06 Feb I take an RMD. Do I have to make estimated tax payments?

Q. I take my Required Minimum Distribution (RMD) in late December. I do not pay estimated taxes quarterly because I do not have extra money to pay estimated taxes during the year. My RMD is about $200,000. Will the IRS will penalize me for not paying the estimated taxes?
— Retired taxpayer

A. The rules that govern how often you’re supposed to pay tax are fairly strict.

It will also depend on several items.

Whether you are required to make quarterly estimated tax payments depends on whether you expect to owe the IRS at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits, said Christine Melilli, a certified public accountant with Smolin, Lupin & Co. in Red Bank.

The same holds true if you expect to owe more than $400 to the state of New Jersey, she said.

We’re guessing that if you have an RMD of $200,000 per year, you are retired and do not have other sources of income with withholdings that could cover the taxes owed, except for possibly Social Security income.

You didn’t say, but it’s possible that you have losses or deductions that may offset this income, Melilli said.

Additionally, she noted, if you are married and file a joint return, your spouse could have enough withholdings to offset any tax liability.

“In short, if the taxes owed with the filing of your return is at least $1,000 or more, then the IRS will penalize you for not making quarterly estimated payments,” she said. “An easy solution would be to request to have federal and state — if necessary — withholdings on your distributions.”

Let’s take it a step further.

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date.

Melilli said if you don’t pay enough tax by the due date of each payment period, you may be charged a penalty even if you’re due a refund when you file your income tax return at the end of the year.

To avoid federal penalties, taxpayers are required to have paid the lesser of at least 90% of the current year tax, or 100% of the tax shown on your prior year’s tax return. If the Adjusted Gross Income (AGI) on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year, she said.

For New Jersey purposes, taxpayers are required to have paid the lesser of at least 80% of the current year tax liability or 100% of your previous year’s liability to avoid penalties, she said.

To compute the quarterly estimated tax payment required, income may be annualized, she said.

You can refer to IRS Form 2210 for the Annualized Income Installment Method.

“Assuming your December distribution is the only source of income requiring you to make an estimated payment, you would be required to remit a quarter four estimated payment that is due on the 15th day of the first month following the close of the tax year,” she said.

For example, if you took your last RMD on December 15, 2023, you would have been required to remit an estimated payment by Jan. 16, 2024. (Jan. 15, 2024 was a federal holiday.)

“Having withholdings on the source may be the best option,” she said.

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This story was originally published in February 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.