Dear Tax Talk,
Will I be subject to a tax penalty for not paying quarterly payments during the year if I elect to take a $30,000 required minimum distribution, or RMD, in December 2009? I did not need to pay any quarterly payments this year. I’m quite sure the added RMD will put me in a higher tax bracket.
Uncle Sam wants its money and it wants it during the tax year, not after. When you underpay your current year tax bill, you could be subject to a penalty in the form of an interest charge unless you meet an exception.
There’s an exception if you paid in as much as the prior year’s tax or if you paid 90 percent of the current year’s tax. In either case, your payments of tax had to be paid evenly throughout the tax year to avoid penalty.
Your payments consist of tax withheld and supplemental payments made in the form of estimated tax payments. Tax withheld is treated as paid evenly throughout the year regardless of when it was withheld. One quarter of your estimated tax is due on or before the 15th day of April, June and September of the current year and January 15th of the following year.
Some people may not pay evenly because of variations in income throughout the year. For example, tax as a result of a capital gain or from a required distribution taken late in the year.
In this case, you can use the seasonal income exception to avoid penalty. However, take it from me, it is not easy to compute your underpayment penalty if using this method. Under this method, you’re required to compute your income for each quarter before the due date of the estimated tax payment and figure all the taxes on that income. It’s like doing four tax returns.
As an alternative to making an estimated tax payment, you should request the appropriate amount of federal income tax be withheld from your distribution. Since the withholding is treated as evenly paid throughout the year, you won’t be considered to have paid late or not paid enough.
Also, remember that there is no requirement to take a minimum distribution in 2009. If you don’t need the money and you think your bracket will be lower next year, don’t take the distribution.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.