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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Tax on IRA conversion depends on withholding
Tax Talk

Income spike can trigger quarterly tax
 

Dear Tax Talk:
I recently converted a rollover IRA to a Roth IRA. Would you know if I have to make a quarterly federal tax payment this quarter? It was a $7,000 account. I expect to owe about $2,000 more in taxes this year. Thank you.
-- Maurice

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Dear Maurice,
The government wants its share of your money just as soon as you get it. That's why a majority of taxpayers pay taxes through withholding on wages. When withholding isn't enough to cover your taxes, the law requires that you pay estimated taxes. If your withholding and estimated taxes are not sufficient or paid timely to cover your tax liability, you can be charged a penalty for underpayment.

Current year estimated taxes are due on a somewhat quarterly basis: Payments are due on the 15th of April, June and September of the current year and 15th of January of the following year. Generally payments must be made evenly throughout the year in order to avoid penalty for underpayment. If your income spikes from quarter to quarter, you can avoid the underpayment penalty but you will have to figure your income, deductions taxes and credits on a quarterly basis. This, to say the least, is complex. 

The underpayment penalty is, in essence, an interest charge based on the underpayment. An underpayment exists when you haven't paid in tax (through withholding and quarterly estimated taxes) in the cases below.

Penalty due when tax not paid is the smaller of:
1. 90 percent of your total expected tax for 2007.
2. Or 100 percent of the total tax shown on your 2006 return.

If your adjusted gross income, or AGI, for 2006 was more than $150,000 ($75,000 if your filing status for 2007 is married filing separately), substitute 110 percent for 100 percent in option No. 2, above. Additionally, you do not have to pay estimated tax if you will pay enough through withholding to keep the amount you will owe with your return under $1,000.

For example, in your case, if your 2006 tax was $10,000 and you expect to have $10,000 in tax withholding in 2007, (and your 2006 AGI was $150,000 or less) you do not have to make estimated tax payments for 2007. No underpayment exists for 2007 regardless of the amount you owe with your return. Any shortfall can be paid on April 15, 2008, without penalty.

Bankrate.com's corrections policy -- Posted: Sept. 17, 2007
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