One of the hassles facing people as they begin retirement is making quarterly estimated tax payments. Most people pay taxes by having them withheld from their paychecks. The paychecks stop when retirement begins. Those pesky tax payments must now come from another source if the retiree has income that is not subject to withholding – interest, dividends, rent, capital gains, etc.
Retirees must pay estimated taxes in 2012 if they expect to owe at least $1,000 in tax after subtracting their withholding (if any) and tax credits, and withholding and credits are smaller than 90 percent of their 2012 taxes or 100 percent of the tax on their 2011 tax liability. Taxpayers whose 2011 adjusted gross income was over $150,000 must pay in at least 110% of last year’s tax liability.
Estimated tax payments for the 2012 tax year are due on April 17, June 15, September 17 of 2012, and January 15 of 2013 and the payments should be made evenly. You cannot make the first three payments small and then send in one large payment. If you don’t pay enough estimated tax, or don’t pay on time, you’ll have to pay a penalty. The penalty is equivalent to nondeductible interest on the amount you underpaid. In 2011, a 4% rate was in effect for the first six months and 3% was used for the second six months.
Those with traditional IRAs may be able to eliminate estimated tax payments after they reach age 70 ½ and begin taking Required Minimum Distributions (RMDs). The RMD can be taken at the end of the year with enough tax withheld to satisfy the entire year’s tax liability. The custodian will report the tax withholding on the 1099-R form in February. The tax will be deemed paid evenly throughout the year which will eliminate the underpayment penalty provided enough tax is withheld.