Avoiding Penalty for Underpayment of Withholding

[tranquility]

Again, ignore kiawah. He is failing to understand the basics of the question.

(Re: withholding v. estimates)

[davew128]

Originally Posted by LdiJ

I think I am going to clarify something that the OP is not understanding:

As long as, for 2008, you paid in an amount equal to 100% of last year's tax liabilty, or 90% of 2008's liability, there is no underwithholding penalty. Its not that you had to pay 100% of last year's tax, its that you had to pay an amount equal to 100% of last year's tax, for THIS year.

Ok, since we're getting into details, those payments need to be through withholding. Making an estimate for 100% of last year's tax on January 15th won't protect you from penalty.

[Kiawah]

Correct.

For the poster, it really depends on the makeup of his income and how much withholding was taken out from w2 salary vs investments, and whether it is up or down over his tax liability for last year. If an individual has substantial investment/other income on top of salary w2's, then you need quarterly estimated taxes to cover the tax liability (above and beyond that liability from the salary).

As an example if investment income is down this year over last (as it very well be with the market the way it's been), or if he's commissioned sales and is down this year, then you don't need to pay the tax liability from LAST year, you just need to submit estimated payments to cover whatever additional investment tax liability is occurring for THIS year. It's the either/or minimum that needs to be in the IRS bucket.

None of us know the posters actual numbers or withholding situation, and how it all compares to last year. He just has to run his numbers to make sure he doesn't get snagged. If he owes, make sure it gets submitted on estimated taxes in the quarter earned.

Peace

[tranquility]

Sigh...let us review one more time.

OP asked:

I received a distribution from an annuity, this year and checked the wrong box in the claim form, so no tax was withheld. The difference between the distribution and its cost basis is about $22,000. Am I going to get hit with any type of penalty (cash penalty, or having to file estimated taxes next year, which I consider a bit of a penalty), and if so, is there anything I can do now to prevent that from happening?

And then clarified his possibilities with:

Also, I have another distribution coming, which is about 2/3 the amount of tax I expect to pay on the earlier distribution... could I just specify them have that distribution withhold 100% and avoid this penalty... in other words, do they care how the money was withheld or from what? or just that it was withheld before 12/31/2008?

Since we didn't really know the exact facts, but have knowledge of the law, the correct answer was given:

Numbers are important, but withholding will save you no matter how late in the year it was made.

Now, 2210 is a nasty, brutish form upon which I am eternally grateful I have a computer when I need to fill one out. Without the exact figures, we can't know the penalty, but we do know the IRS DOES NOT CARE how the money was withheld or from what, as long as it WAS withheld before 12/31/2008.

[bicker]

Originally Posted by LdiJ

I think I am going to clarify something that the OP is not understanding:

As long as, for 2008, you paid in an amount equal to 100% of last year's tax liabilty, or 90% of 2008's liability, there is no underwithholding penalty. Its not that you had to pay 100% of last year's tax, its that you had to pay an amount equal to 100% of last year's tax, for THIS year.

THIS was INCREDIBLY helpful to me in understanding. My withholding for 2008 was definitely as much as my total tax for 2007, no question about it. Okay, so I basically don't have to worry about anything, except paying the actual tax on the distributions! Excellent! Thanks!