Dear Tax Talk,
Is there a benefit to not having taxes withheld from Social Security and pension payments, and then paying estimated taxes through the year? I ask because this is how Mama’s CPA has set things up for her. I found this out after estimated payments were missed while Mama was hospitalized long term.

The only benefit I can see is that the CPA makes more money because he sends her pre-addressed envelopes (with his return address) and forms to send with the checks. Is there a benefit to paying estimated tax versus withholding taxes that I’m not aware of?

— Jenny

Dear Jenny,
You have found out the hard way that generally the IRS charges tax underpayment penalties, late payment penalties and interest if you end up owing at least $1,000 in taxes after taking into consideration your taxes withheld and any refundable tax credit.

You are correct: If enough taxes have been withheld from Social Security and pension payments, then you do not need to have estimated tax payments calculated for your mother by the CPA who prepares her tax return.

My best guess is that the CPA was trying to make this easier for your mother, who may not have wanted to deal with the time and aggravation of increasing the taxes withheld in light of her long-term hospitalization. My recommendation is for you and your mother to discuss the situation with the tax preparer and perhaps consider requesting that the IRS waive the tax penalty due to “reasonable cause” for not paying on time. The IRS is usually very helpful in these types of situations.

What is reasonable cause?

The IRS considers the following situations as sound reasons for waiving a tax penalty for failure to pay tax when due:

  • Fire, casualty, natural disaster or other disturbances.
  • Inability to obtain records.
  • Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family.
  • Another reason which establishes that you did your best to meet your tax obligation but were unable to do so.

Source: IRS

Believe me when I tell you that tax preparers do not try to create additional work for themselves or fees for their clients by preparing the estimated-tax-payment vouchers. What we are diligently trying to avoid is having penalties and interest become a problem for not paying in enough, and then having the taxpayer receiving the dreaded IRS notice in the mail.

IRS Publication 505, Tax Withholding and Estimated Tax, can help you find your way through this maze so that you stay penalty- and interest-free. It is 62 pages of rules and more rules and then all of the exceptions to the rules.

Thanks for the great question and best wishes to you and your mother.

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