21 Mar Proper tax withholding from IRAs

Q. If one’s income is basically from Social Security and the Required Minimum Distribution (RMD) from an IRA, is it acceptable to withhold the entire year’s tax bill from the RMD taken towards the end of the year rather than paying quarterly estimated tax? No monthly tax is being withheld from Social Security income. — Withholding

A. That depends on how much tax you will owe for the year.

If the tax you owe is more than $1,000, the federal government will not allow you to pay your income taxes in one single payment unless that payment was made in the first quarter of the year, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

The rules are as follows:

You must pay your taxes in through payroll withholding or quarterly estimated payments or a combination of the two, Kiely said. The amount you must pay in is the lesser of 100 percent of the prior’s year’s taxes or 90 percent of the current year’s taxes. If your adjusted gross income last year is $150,000 or more, you must pay in 110 percent of the prior year’s tax or 90 percent of this year’s tax.

The quarterly payments are due April 15 — the day your tax return is due — June 15, Sept. 15 and Jan. 15 of the next year.

“The IRS and state governments assume all income and withholding reported on W-2s and 1099s was earned equally over the year and the taxes were withheld evenly over the year,” Kiely said. “The IRS has no idea when the income was earned.”

An RMD made on Dec. 31, 2015 would show up on a 2015 1099-R form, but when the distribution was made is not revealed on the form, Kiely said.

“Therefore, the answer to your question: it is acceptable to withhold the entire year’s tax from a Required Minimum Distribution (RMD) made late in the year,” Kiely said. “And there is no need to make quarterly estimated tax payments.”
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This story was first posted in March 2016.