Paying Unpaid FIT for 2011 on Retirement Income

[Swatara48&]

I have about $2,000 per month in taxable retirement income and have not had any tax withheld. I'm married and file a joint return. We'll have itemized deductions of probably $13K. I assume that I should work up my taxes before the end of the year, then pay any estimated tax (or portion thereof) before EOY, then pay the rest when I file my 2011 taxes. Is this correct thinking? And how do I determine how much I must (or should) pay before EOY? Should I do this every year, pay quaterly (or other) estimated FIT, or have the payor withhold FIT? Thanks!

[clydewolf]

Swatara488,

We are to pay our income tax as our income is received.
We can do that through withholding or with estimated payments.

How much should we have withheld or pay in estimated payments.
The IRS has some safe harbors to avoid the penalty.
- If our withholding plus tax credits results in our 1040 tax due of less than $1,000, there is no penalty.
- If our withholding plus tax credits provides for 90% of our 1040 tax due, there is no penalty.
- If our withholding is equal to our last year's tax, there is no penalty.

When we use withholding to pay our tax bill, it is assumed that we paid throughout the year.
That is true even if we take an IRA distribution on December 31, and have enough withheld to meet one of the items above.
The IRS looks at that withholding, and says we paid throughout the year.

When you have received your monthly income throughout the year and have not used withholding or have not made timely estimated payments, you are likely to be subject to a penalty. The penalty is about 4% on the amount you should have paid, but did not.

For 2011 you:
- will have 2 personal exemptions * $3,700 = $7,400 ( Add $1,150 to that for each person that is over age 65 at the end of the year).
- The Standard Deduction for MFJ is $11,600.

With your income of $24,000 minus the amounts for personal exemptions ($74,00 + $11,600 = $19,000) your taxable income would be $6,000.
Taxed at 10%, your tax would be $600.
Paying this amount with your 1040 would not result in any penalty as described above.
You would not be required to make estimated payments.

BUT - If you have tax exempt interest and SS benefits reported on your 1040, some of your SS benefit may be taxable.
That could cause you to owe more income tax.