Withholding or Estimated Taxes?

[Ananisapta]

I live in NC. My only sources of income are Social Security and Required Minimum Distributions from my SEP/IRA and my wife's IRA. We file jointly.

My broker offers to deduct state (4%) and federal (10%) withholding from transfers I make from our retirement accounts to our bank checking account. If I elect this option, does that relieve me of the bother of estimating taxes and making quarterly payments?

 

[LdiJ]

I live in NC. My only sources of income are Social Security and Required Minimum Distributions from my SEP/IRA and my wife's IRA. We file jointly.

My broker offers to deduct state (4%) and federal (10%) withholding from transfers I make from our retirement accounts to our bank checking account. If I elect this option, does that relieve me of the bother of estimating taxes and making quarterly payments?

It honestly depends on how much overall income that you have. If your income is low, and therefore none of your SS benefits are taxable, then 10% could be enough. If you are in a higher tax bracket than 10% it won't be enough and you can still get dinged for not making estimated payments.

Your broker CAN withhold more than 10% if you need more than 10% withheld.

 

[FlyingRon]

You only have to make estimated tax payments if you are going to have excess tax obligation over whatever other payments (withholding) you might do.

Frankly, I'd tell him to skip it and do my own estimated tax payments. It's only four times a year and no point in forking money over to the government before you have to. You can do it on line or you can mail a check. Note that the feds take a day to process an online payment but the blasted state of NC takes something like five days to schedule an online payment. Take that into account if you chose to go that way.

Note that your tax liability depends on any non-taxsheltered investments as well. So if you own stocks, bonds, or mutual funds outside the IRAs, you'll need to see if there are taxable events going on (dividends, interest, capital gains distributions). Fortunately, these days you can pull that info online to help you make your decisions.

 

[LdiJ]

You only have to make estimated tax payments if you are going to have excess tax obligation over whatever other payments (withholding) you might do.

Frankly, I'd tell him to skip it and do my own estimated tax payments. It's only four times a year and no point in forking money over to the government before you have to. You can do it on line or you can mail a check. Note that the feds take a day to process an online payment but the blasted state of NC takes something like five days to schedule an online payment. Take that into account if you chose to go that way.

Note that your tax liability depends on any non-taxsheltered investments as well. So if you own stocks, bonds, or mutual funds outside the IRAs, you'll need to see if there are taxable events going on (dividends, interest, capital gains distributions). Fortunately, these days you can pull that info online to help you make your decisions.

I have the opposite opinion. I see too many of my older tax clients get themselves in a bind because when it comes time to make an estimated payment, they don't have the money. I find that when proper withholding is going on, the money does not get spent on other things/emergencies.

I also have several tax clients who withhold when they have absolutely no tax liability. They use their refunds to pay their property taxes for the year.

 

[FlyingRon]

Better for them to have withdrawals made to a seperate account for the purpose of paying the taxes. Yeah, it's not making much interest these days, but at least you're not subsidizing the government. Unless that's what the broker is doing on their behalf...

 

[LdiJ]

Better for them to have withdrawals made to a seperate account for the purpose of paying the taxes. Yeah, it's not making much interest these days, but at least you're not subsidizing the government. Unless that's what the broker is doing on their behalf...

I just do not agree with you and that is ok. Many people in the tax business have the same opinion that you have. However, most of them really do not deal with lower income taxpayers very often and therefore do not understand how hard it is for them to make estimated payments.

 

[PayrollHRGuy]

So you feel it is better for the low income taxpayers to give the government a no interest loan for up to a year? The OP is an adult who worked and saved throughout his life by the look of things. I'm betting he is smart enough to figure out how much he is going to owe for the year (or at least hire someone to figure it out for him) and then put a percentage of that into an account just for the quarterly estimate.

 

[quincy]

I just do not agree with you and that is ok. Many people in the tax business have the same opinion that you have. However, most of them really do not deal with lower income taxpayers very often and therefore do not understand how hard it is for them to make estimated payments.

Lower income does not equal lower intelligence.

 

[LdiJ]

So you feel it is better for the low income taxpayers to give the government a no interest loan for up to a year? The OP is an adult who worked and saved throughout his life by the look of things. I'm betting he is smart enough to figure out how much he is going to owe for the year (or at least hire someone to figure it out for him) and then put a percentage of that into an account just for the quarterly estimate.

Every person who receives a paycheck with withholding coming out is doing the same thing. They do not have the option of holding the money all year long at all. If someone is going to owe tax, and they can have withholding, then they are expected to withhold. At small as today's interest rates are its kind of a waste of time to hold money for an extra two months when there is the risk that if you do not have withholding, that you will end up spending it.

 

[LdiJ]

Lower income does not equal lower intelligence.

See my previous response to PayrollHRGuy.

I also never even hinted that they had less intelligence. I think I was pretty specific that they are living more hand to mouth and do not have any real "extra".

 

[PayrollHRGuy]

Every person who receives a paycheck with withholding coming out is doing the same thing. They do not have the option of holding the money all year long at all. If someone is going to owe tax, and they can have withholding, then they are expected to withhold. At small as today's interest rates are its kind of a waste of time to hold money for an extra two months when there is the risk that if you do not have withholding, that you will end up spending it.

Everyone who receives a paycheck does that because they have to by law. Over the last 5 years I have received no more than a $5.00 refund my 2016 refund was a total of $2.00 and I made the IRS send me a check, by doing some planning and math anyone can do it and it is super simple for people on a fixed income as the OP is.

On the other side I see plenty of employee who do stupid stuff like increase the number of deductions they should have and get stuck with big bills come April 15th.

 

[LdiJ]

Everyone who receives a paycheck does that because they have to by law. Over the last 5 years I have received no more than a $5.00 refund my 2016 refund was a total of $2.00 and I made the IRS send me a check, by doing some planning and math anyone can do it and it is super simple for people on a fixed income as the OP is.

That is wonderful for you. You obviously have enough money that you can put money aside without the risk of emergencies or problems popping up that will cause you to spend it.

On the other side I see plenty of employee who do stupid stuff like increase the number of deductions they should have and get stuck with big bills come April 15th.

Yes, there are always the ones who do that.

 

[PayrollHRGuy]

That is wonderful for you. You obviously have enough money that you can put money aside without the risk of emergencies or problems popping up that will cause you to spend it.

It has NOTHING to do with how much money one has or doesn't have. It has to do with the math skills to do it and you either have or can rent those along with some dicipline. There is every reason to believe that the OP and no reason to believe anyone else doesn't can't do it.

 

[Zigner]

That is wonderful for you. You obviously have enough money that you can put money aside without the risk of emergencies or problems popping up that will cause you to spend it.

Re-read what he wrote. He's not talking about not having taxes withheld...he's talking about only have exactly the right amount withheld so that you and the IRS "break even" at the end of the year.

 

[LdiJ]

Re-read what he wrote. He's not talking about not having taxes withheld...he's talking about only have exactly the right amount withheld so that you and the IRS "break even" at the end of the year.

This is what he wrote:

So you feel it is better for the low income taxpayers to give the government a no interest loan for up to a year? The OP is an adult who worked and saved throughout his life by the look of things. I'm betting he is smart enough to figure out how much he is going to owe for the year (or at least hire someone to figure it out for him) and then put a percentage of that into an account just for the quarterly estimate.

I have no problem with advising people to withhold just the right amount. I actually was advising in that direction to the OP in the first place. However he never told us how much money was involved so I couldn't tell him whether or not 10% was enough.