Annualized method for estimated taxes

[moustachebar]

I haven't done a Roth conversion yet this year but am thinking about it.

Usually I divide my estimated tax payment into equal fourths, but since I have very little involved this year and potentially a conversion in three second quarter, I was thinking of using the annualized method.

When I fill out the worksheet, I have very little I am required to send in, even when I do a decent sized conversion in q2. It defaults to sending in the lower of your actual tax due or one fourth of your estimated withholding. Meaning you never send in tax on the conversion chunk, which seems wrong.

I also took a look at the spreadsheet that was posted a decade ago. It gave the same result, but also suggested sending in that quarter's actual tax due instead.

Does anyone have background with using this method? Would you send in the tax due as the old spreadsheet suggests?

Thank you!

[seattlecyclone]

The estimated tax formulas are based on your current estimates and also your actual taxes paid last year. Whichever is lowest is what you're required to send in. If you make a big Roth conversion that puts your income higher than last year, you have the option to wait until you file in the spring to pay the extra tax.

[MDM]

If possible for you, using withholding instead of estimated tax payments may be a better option.

In any case, see details about the Safe harbors to which seattlecyclone alluded.

If you use withholding, you may need to look only at Part I of Form 2210. 
If equal or front-loaded estimated tax payments are used, numbers for only parts I and III (and perhaps only lines 10 and 11 in Part III) are needed.
If you also want to consider back-loaded income for the year, Schedule AI is a big jump in complexity.

[moustachebar]

Thank you. Armed with your confirmation, I decided to figure out how why I was getting unbelievably low estimated payments.

So I went over it again. What I was doing wrong was estimating my whole-year as if the Q2 conversion was all I would do. When I use a worst case (high conversion) estimate, annualizing does save me sending in anything for Q1, which is fair; no conversion happened. But by Q2 I have to send in almost as much as via the simple quarterly method, and at the cost of completing form 2210 and perhaps paying a penalty. Probably a small one, but still.

Thanks for the help!

[moustachebar]

I didn't end up doing a conversion while things were really down. Taxes were a higher priority, and since I try to avoid timing, well, I avoided timing! Oh well.

But now I'm thinking. If I end up doing conversion all at year end, I'm loaning a bunch of money to the government all year. I could make decent money on that money.

So I'm thinking of intentionally using 2210/ schedule AI. I had to do this once, before I knew about estimated taxes, and I have a spreadsheet. It doesn't seem so bad if you don't itemize and have limited income events like one or two big conversions. It looks like maybe I won't even have a penalty if I justify it via the form (or sometimes they want a letter?).

And if I end up not converting, which is admittedly not super likely but could happen due to job loss which would kick me over to ACA, I'm not overpaying.

Does this make sense?

[terran]

Makes sense to me. It's what I do. A few other advantages to waiting is that it gives you better information about other sources of income if you're trying to stay under a certain bracket and more information about possible tax law changes, especially this year since expiring brackets might be extended making future conversions more attractive than they are right now so you might decide to convert less this year (or more if they aren't extended).

[moustachebar]

Good points, thank you. I saw guidance about having an accountant fill out these forms, but I did it, admittedly I'm a simple case.

Did you write a letter of explanation, or pay a penalty?

[terran]

2024 was the first year I needed to fill out the full form. No attached letter and no penalty, but still time to be audited so I can't say for sure.

[moustachebar]

Thank you! I just filled it out and come to the same conclusion. My Form 2210 is all 0s and the penalty form also shows 0s.

It looks like if my lump of income is in Q4, that quarter's estimated is due 1/15/26. I would have expected to have to submit Q1-Q3 estimated by that date as well, but on the 2210 it looks like as long as I send them Q4 I'm good and can send Q1-Q3 by 4/15/26. Is that right? I can't imagine I did this correctly, but having income under the annualized standard deduction for Q1-Q3, that's what I get since no tax is due for actual income those quarters.

For Q4, they just want you to pay the smaller of that quarter's annualized tax or sum of all quarters' estimateds via equal-quarters method.

Seems more than fair.

[secondcor521]

It looks like if my lump of income is in Q4, that quarter's estimated is due 1/15/26. I would have expected to have to submit Q1-Q3 estimated by that date as well, but on the 2210 it looks like as long as I send them Q4 I'm good and can send Q1-Q3 by 4/15/26. Is that right? I can't imagine I did this correctly, but having income under the annualized standard deduction for Q1-Q3, that's what I get since no tax is due for actual income those quarters.

If you're talking about tax year 2025 (and I think you are), then Q1 ES is due 4/15/2025, Q2 ES is due 6/15/2025, Q3 ES is due 9/15/2025, and Q4 ES is due 1/15/2026.

If you owe no taxes in Q1 through Q3 and do the Roth conversion in December 2025, then my understanding is you can make the single Q4 ES payment by 1/15/2026.  You might have to do the 2210 AI thing.

I had a similar fact pattern in 2024 - although I think I maybe should have made a Q3 payment because my income was high enough - but didn't realize it until spring 2025.  I just made a Q4 ES payment on 1/10 for pretty much the full amount of my tax liability.  I didn't fill out 2210; if the IRS sends me a bill I'll just pay it but I'm hoping they won't.

[moustachebar]

Yes, 2025 (almost wrote 2015, time is flying :)

Thanks, that's exactly what I'm thinking. I was thinking of sending in the entire liability in January as well. Though it looks like I would really owe just Q4 by that date with the rest due in April. I guess they figured it's minuscule enough not to have been taxed. But if it's over 1000 I owe, I'll be sure to do in by January.

I didn't mind sending it in quarterly in the past, but I can make a couple weekend overnight trips worth on the interest if I keep it. And the aforementioned backup plan for health care.

Thanks again for the help. Hope this is also useful for someone else!