Some taxpayers who expect to owe at least $1,000 in taxes from self-employed income must make quarterly tax payments. This typically includes freelancers, independent contractors, and small-business owners, but retired individuals may need to make quarterly payments as well, especially if they earn income from investments or retirement plans. Optima Tax Relief explains how retirees can avoid penalties for late quarterly tax payments.
Typically, there is a late penalty when quarterly taxes are not paid. There are also required minimum distributions (RMDs) that must be withdrawn from most retirement accounts, including 401(k) plans and individual retirement accounts. Currently, RMDs are not required until 72. However, there are several federal bills that are opting for a higher start age of 75, which could give the taxpayer more time to move their assets. If a taxpayer is still employed and contributes to their company retirement plan, they are not required to make RMDs from that account until they retire. Additionally, there are no RMDs with Roth IRAs, at least not in the account owner’s lifetime. If the account is inherited, the balance must be fully withdrawn within 10 years of the account owner’s death, unless the beneficiary is the spouse.
Certain eligible retirees may be able to correct missed quarterly tax payments through their RMDs. For example, if a retired taxpayer is required to withdraw a sum of money from their retirement account by the end of the year to satisfy their RMD, they can calculate their tax liability and then deduct that amount from their withdrawal amount.
Quarterly tax payments are due in April, June, September, and in January of the following year. If a taxpayer isn’t sure of how much to pay for their quarterly tax payments, a safe bet is to use the previous year’s tax bill as a reference. If last year’s tax bill was $8,000, the taxpayer would divide the bill into four equal payments of $2,000, one for each quarter. While this method will ensure no late payment penalties are incurred, it will not always cover the entire tax bill for the current year. To gain a better understanding of a potential tax bill, it may be best to speak with a knowledgeable tax professional.