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Estimated Tax on Savings Bond Interest?
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Rick
Jul 19, 2012, 3:23:00 PM7/19/12
to
This is a follow-up to a question asked previously on this site. Taxpayer
owns $98,000 worth of Series EE savings bonds, which will mature in July
2022. Because of the 4% interest they earn, taxpayer does not plan to cash
them in before maturity and also does not plan to use them for educational
purposes. The accumulated interest to date is roughly $63,000. No bonds
have been cashed in and no taxes have ever been paid on them (cash method of
reporting).
Based on the responses given here, the taxpayer has an option to switch to
an accrual reporting method and report the $63,000 in accumulated interest
on his next tax return, and then report annual interest each year until
final maturity in 2022. Since that will be a big chunk of income to report
at one time, what does he have to do to insure he won't be hit with a
penalty for under-withholding? Taxpayer has never had to file estimated
taxes and would not otherwise be in a position where he might incur a
penalty. Does he need to file estimated taxes prior to filing his 2012
return for this one-time major income spike? Suppose he does not make the
decision to change the accounting method until just before he files the 2012
return?
--
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
owns $98,000 worth of Series EE savings bonds, which will mature in July
2022. Because of the 4% interest they earn, taxpayer does not plan to cash
them in before maturity and also does not plan to use them for educational
purposes. The accumulated interest to date is roughly $63,000. No bonds
have been cashed in and no taxes have ever been paid on them (cash method of
reporting).
Based on the responses given here, the taxpayer has an option to switch to
an accrual reporting method and report the $63,000 in accumulated interest
on his next tax return, and then report annual interest each year until
final maturity in 2022. Since that will be a big chunk of income to report
at one time, what does he have to do to insure he won't be hit with a
penalty for under-withholding? Taxpayer has never had to file estimated
taxes and would not otherwise be in a position where he might incur a
penalty. Does he need to file estimated taxes prior to filing his 2012
return for this one-time major income spike? Suppose he does not make the
decision to change the accounting method until just before he files the 2012
return?
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
John Levine
Jul 19, 2012, 5:00:17 PM7/19/12
to
>Based on the responses given here, the taxpayer has an option to switch to
>an accrual reporting method and report the $63,000 in accumulated interest
>on his next tax return, and then report annual interest each year until
>final maturity in 2022. Since that will be a big chunk of income to report
>at one time, what does he have to do to insure he won't be hit with a
>penalty for under-withholding?
So long as the taxpayer makes timely payments of 100% of the prior
>an accrual reporting method and report the $63,000 in accumulated interest
>on his next tax return, and then report annual interest each year until
>final maturity in 2022. Since that will be a big chunk of income to report
>at one time, what does he have to do to insure he won't be hit with a
>penalty for under-withholding?
year's taxes (110% if AGI was over $150K), there's no penalty.
See Pub 505 for details, compute the penalty (likely $0 in this case)
on Form 2210.
R's,
John
--
Regards,
John Levine, jo...@iecc.com, Primary Perpetrator of "The Internet for Dummies",
Please consider the environment before reading this e-mail. http://jl.ly
Phil Marti
Jul 20, 2012, 9:28:55 AM7/20/12
to
On Thursday, July 19, 2012 2:23:00 PM UTC-5, Rick wrote:
> Based on the responses given here, the taxpayer has an option to switch to
> an accrual reporting method and report the $63,000 in accumulated interest
> on his next tax return, and then report annual interest each year until
> final maturity in 2022. Since that will be a big chunk of income to report
> at one time, what does he have to do to insure he won't be hit with a
> Based on the responses given here, the taxpayer has an option to switch to
> an accrual reporting method and report the $63,000 in accumulated interest
> on his next tax return, and then report annual interest each year until
> final maturity in 2022. Since that will be a big chunk of income to report
> penalty for under-withholding? Taxpayer has never had to file estimated
> taxes and would not otherwise be in a position where he might incur a
> penalty. Does he need to file estimated taxes prior to filing his 2012
> return for this one-time major income spike? Suppose he does not make the
> decision to change the accounting method until just before he files the 2012
> return?
When he makes the decision is irrelevant.
> taxes and would not otherwise be in a position where he might incur a
> penalty. Does he need to file estimated taxes prior to filing his 2012
> return for this one-time major income spike? Suppose he does not make the
> decision to change the accounting method until just before he files the 2012
> return?
Unless 2011 total tax was zero it's too late to completely avoid a penalty. To minimize the penalty pay 1/2 of 2011 tax ASAP, 1/4 on 9/15/2012, and 1/4 on 1/15/2013. Then use Form 2210 on the 2012 return to calculate the penalty. See Form 1040-ES for payment instructions.
Phil Marti
VITA/TCE Volunteer
Clarksburg, MD
John Levine
Jul 20, 2012, 12:20:56 PM7/20/12
to
>Unless 2011 total tax was zero it's too late to completely avoid a penalty.
Are you sure? What about the rule that there's no penalty if you paid as
much as you owed last year?
R's,
John
--
Regards,
John Levine, jo...@iecc.com, Primary Perpetrator of "The Internet for Dummies",
Please consider the environment before reading this e-mail. http://jl.ly
Arthur Kamlet
Jul 20, 2012, 1:23:41 PM7/20/12
to
In article <juc0gs$6h$1...@leila.iecc.com>, John Levine <jo...@iecc.com> wrote:
>>Unless 2011 total tax was zero it's too late to completely avoid a penalty.
>
>Are you sure? What about the rule that there's no penalty if you paid as
>much as you owed last year?
Left out a word. If you paid "timely" ..... That rule prevents you
>>Unless 2011 total tax was zero it's too late to completely avoid a penalty.
>
>Are you sure? What about the rule that there's no penalty if you paid as
>much as you owed last year?
from waiting until December to mail in your entire estimated tax and
avoid penalty.
--
ArtKamlet at a o l dot c o m Columbus OH K2PZH
Rick
Jul 20, 2012, 1:34:47 PM7/20/12
to
"John Levine" <jo...@iecc.com> wrote in message
news:ju9sgi$8lc$1...@leila.iecc.com...
>>Based on the responses given here, the taxpayer has an option to switch to
>>an accrual reporting method and report the $63,000 in accumulated interest
>>on his next tax return, and then report annual interest each year until
>>final maturity in 2022. Since that will be a big chunk of income to
>>report
>>at one time, what does he have to do to insure he won't be hit with a
>>penalty for under-withholding?
>
> So long as the taxpayer makes timely payments of 100% of the prior
> year's taxes (110% if AGI was over $150K), there's no penalty.
>
> See Pub 505 for details, compute the penalty (likely $0 in this case)
> on Form 2210.
>
> R's,
> John
I should have clarified that taxpayer is retired and does not have any
>>an accrual reporting method and report the $63,000 in accumulated interest
>>on his next tax return, and then report annual interest each year until
>>final maturity in 2022. Since that will be a big chunk of income to
>>report
>>at one time, what does he have to do to insure he won't be hit with a
>>penalty for under-withholding?
>
> So long as the taxpayer makes timely payments of 100% of the prior
> year's taxes (110% if AGI was over $150K), there's no penalty.
>
> See Pub 505 for details, compute the penalty (likely $0 in this case)
> on Form 2210.
>
> R's,
> John
withholding in addition to not paying any estimated tax. His only other
taxable income is sufficiently offset by deductions and exemptions that he
does not earn enough to owe any taxes. If he now decides to recognize the
$63,000 in accumulated interest, it will push his income up to a level where
he will have to pay at least a couple of thousand dollars in tax. Will he
be subject to an under-withholding penalty for what is essentially a one
time income spike? How can he avoid this, especially if doesn't make the
decision to recognize the income until the point where he files the return?
(In other words, if he decides in April 2013 to recognize the income, it
will be too late for him to turn back the clock and make quarterly estimated
payments in 2012).
Rick
Jul 20, 2012, 1:35:20 PM7/20/12
to
"Phil Marti" <prm2...@verizon.net> wrote in message
news:8a074435-b52c-4c4a...@googlegroups.com...
situation where he has some flexibility about when to do the conversion, he
needs to make the decision by April of the year prior to the conversion so
that he will have time to make quarterly estimated tax payments.
Bill Brown
Jul 20, 2012, 2:55:46 PM7/20/12
to
On Friday, July 20, 2012 1:35:20 PM UTC-4, Rick wrote:
> So it sounds like the moral of the story is that in this particular
> situation where he has some flexibility about when to do the conversion, he
> needs to make the decision by April of the year prior to the conversion so
> that he will have time to make quarterly estimated tax payments.
>
Well there are other exceptions that would allow for example, making most of the estimated payments in the same quarter as most of the taxpayer's income is realized.
> So it sounds like the moral of the story is that in this particular
> situation where he has some flexibility about when to do the conversion, he
> needs to make the decision by April of the year prior to the conversion so
> that he will have time to make quarterly estimated tax payments.
>
John Levine
Jul 20, 2012, 3:10:09 PM7/20/12
to
>>Are you sure? What about the rule that there's no penalty if you paid as
>>much as you owed last year?
>
>Left out a word. If you paid "timely" ..... That rule prevents you
>from waiting until December to mail in your entire estimated tax and
>avoid penalty.
I'm sorry, but in this case that's just wrong.
>>much as you owed last year?
>
>Left out a word. If you paid "timely" ..... That rule prevents you
>from waiting until December to mail in your entire estimated tax and
>avoid penalty.
Assuming the taxpayer makes the election to pay tax on the bonds
sometime in 2012, if he pays as much in estimates and withholding as
he owed for 2011 (apparently zero), there is no penalty if he pays the
2012 tax due with his return in April 2013.
In a different situation where the taxpayer did have to make estimated
payments, yes, they would have to be made in four timely installments,
but that doesn't apply in this case.
If you don't believe me, read IRS Publication 505, particularly the
flowchart in Figure 2-A and the paragraphs above and below the figure.
R's,
John
--
Regards,
John Levine, jo...@iecc.com, Primary Perpetrator of "The Internet for Dummies",
Please consider the environment before reading this e-mail. http://jl.ly
Rick
Jul 20, 2012, 4:16:23 PM7/20/12
to
"Bill Brown" <w.p.br...@gmail.com> wrote in message
news:5595c605-4567-44b4...@googlegroups.com...
> On Friday, July 20, 2012 1:35:20 PM UTC-4, Rick wrote:
>
>> So it sounds like the moral of the story is that in this particular
>> situation where he has some flexibility about when to do the conversion,
>> he
>> needs to make the decision by April of the year prior to the conversion
>> so
>> that he will have time to make quarterly estimated tax payments.
>>
>
> Well there are other exceptions that would allow for example, making most
> of the estimated payments in the same quarter as most of the taxpayer's
> income is realized.
>
But in this case, the only "income" is the paperwork income realized by the
>
>> So it sounds like the moral of the story is that in this particular
>> situation where he has some flexibility about when to do the conversion,
>> he
>> needs to make the decision by April of the year prior to the conversion
>> so
>> that he will have time to make quarterly estimated tax payments.
>>
>
> Well there are other exceptions that would allow for example, making most
> of the estimated payments in the same quarter as most of the taxpayer's
> income is realized.
>
taxpayer when he changes the accounting method on his tax return to
recognize the accrued interest on the bonds. So for IRS purposes, if he
makes the decision to change the accounting method on his 2012 return, which
he files in April 2013, can he assume the income is all realized on
12/31/2012?
Rick
Jul 20, 2012, 4:17:16 PM7/20/12
to
news:jucae7$q7f$1...@leila.iecc.com...
was employed and had income and withholding. In 2012, he is retired and, in
the absence of the savings bond conversion, his income would be sufficiently
offset by deductions and exemptions that he would owes no taxes. In 2012 he
has no withholding and has made no estimated tax payments.
As I understand the replies that have been made so far, the taxpayer would
need to have paid as much or more in withholding or estimated taxes in 2012
than he paid in taxes in 2011 to avoid a penalty. That's not the case here
because his taxes in 2011 were non-zero and his estimated taxes and
withholding are zero in 2012.
So if he wants to switch his accounting method on his 2012 return (to be
filed in April 2013), it appears he would have to make sufficient estimated
payments in 2012. The question, it seems to me, is when does the IRS
consider the income to be "realized"? This isn't a case where the taxpayer
has actual money coming in at different times during the year, and the
taxpayer can vary the payments based on when the income is realized. The
income is just a paperwork thing where he is changing his accounting method
to recognize that he has earned a bunch of savings bond interest over the
past 20 years which he is now going to pay tax on. So for IRS purposes, if
he makes this decision in April 2013 when he files his return, does the IRS
assume the income was evenly "earned" over the full calendar year 2012 or
can the taxpayer assume he actually earns it on the last day of 2012?
And not to further muddy the waters, but the taxpayer turns 62 in early
2013, and I see on the IRS website that there is some exception to the
penalty available to people who are retired and 62 or over. Not sure if
that would apply here since he didn't turn 62 until after the tax year.
>>>Are you sure? What about the rule that there's no penalty if you paid as
>>>much as you owed last year?
>>
>>Left out a word. If you paid "timely" ..... That rule prevents you
>>from waiting until December to mail in your entire estimated tax and
>>avoid penalty.
>
> I'm sorry, but in this case that's just wrong.
>
> Assuming the taxpayer makes the election to pay tax on the bonds
> sometime in 2012, if he pays as much in estimates and withholding as
> he owed for 2011 (apparently zero), there is no penalty if he pays the
> 2012 tax due with his return in April 2013.
>
> In a different situation where the taxpayer did have to make estimated
> payments, yes, they would have to be made in four timely installments,
> but that doesn't apply in this case.
>
> If you don't believe me, read IRS Publication 505, particularly the
> flowchart in Figure 2-A and the paragraphs above and below the figure.
>
> R's,
> John
> --
> Regards,
> John Levine, jo...@iecc.com, Primary Perpetrator of "The Internet for
> Dummies",
> Please consider the environment before reading this e-mail. http://jl.ly
>>
Just to further clarify, the taxpayer did not owe zero taxes in 2011. He
>>>much as you owed last year?
>>
>>Left out a word. If you paid "timely" ..... That rule prevents you
>>from waiting until December to mail in your entire estimated tax and
>>avoid penalty.
>
> I'm sorry, but in this case that's just wrong.
>
> Assuming the taxpayer makes the election to pay tax on the bonds
> sometime in 2012, if he pays as much in estimates and withholding as
> he owed for 2011 (apparently zero), there is no penalty if he pays the
> 2012 tax due with his return in April 2013.
>
> In a different situation where the taxpayer did have to make estimated
> payments, yes, they would have to be made in four timely installments,
> but that doesn't apply in this case.
>
> If you don't believe me, read IRS Publication 505, particularly the
> flowchart in Figure 2-A and the paragraphs above and below the figure.
>
> R's,
> John
> --
> Regards,
> John Levine, jo...@iecc.com, Primary Perpetrator of "The Internet for
> Dummies",
> Please consider the environment before reading this e-mail. http://jl.ly
>>
was employed and had income and withholding. In 2012, he is retired and, in
the absence of the savings bond conversion, his income would be sufficiently
offset by deductions and exemptions that he would owes no taxes. In 2012 he
has no withholding and has made no estimated tax payments.
As I understand the replies that have been made so far, the taxpayer would
need to have paid as much or more in withholding or estimated taxes in 2012
than he paid in taxes in 2011 to avoid a penalty. That's not the case here
because his taxes in 2011 were non-zero and his estimated taxes and
withholding are zero in 2012.
So if he wants to switch his accounting method on his 2012 return (to be
filed in April 2013), it appears he would have to make sufficient estimated
payments in 2012. The question, it seems to me, is when does the IRS
consider the income to be "realized"? This isn't a case where the taxpayer
has actual money coming in at different times during the year, and the
taxpayer can vary the payments based on when the income is realized. The
income is just a paperwork thing where he is changing his accounting method
to recognize that he has earned a bunch of savings bond interest over the
past 20 years which he is now going to pay tax on. So for IRS purposes, if
he makes this decision in April 2013 when he files his return, does the IRS
assume the income was evenly "earned" over the full calendar year 2012 or
can the taxpayer assume he actually earns it on the last day of 2012?
And not to further muddy the waters, but the taxpayer turns 62 in early
2013, and I see on the IRS website that there is some exception to the
penalty available to people who are retired and 62 or over. Not sure if
that would apply here since he didn't turn 62 until after the tax year.
John Levine
Jul 20, 2012, 5:30:36 PM7/20/12
to
>Just to further clarify, the taxpayer did not owe zero taxes in 2011. He
>was employed and had income and withholding. In 2012, he is retired and, in
>the absence of the savings bond conversion, his income would be sufficiently
>offset by deductions and exemptions that he would owes no taxes. In 2012 he
>has no withholding and has made no estimated tax payments.
Ah, that's different. Feel free to ignore everything I've said so far.
>was employed and had income and withholding. In 2012, he is retired and, in
>the absence of the savings bond conversion, his income would be sufficiently
>offset by deductions and exemptions that he would owes no taxes. In 2012 he
>has no withholding and has made no estimated tax payments.
In this case, how about if the taxpayer waits and makes the election
next year. Since he has zero tax for 2012, he can make zero estimated
tax payments in 2013, and pay tax on the accrued interest in April
2014.
I looked around for references on Sec. 454 elections and found nothing
about when during the year the IRS might consider it to have happened.
If they consider it to have been made evenly over the whole year, it's
too late for timely estimated payments for the first six months of
2012.
On the other hand, the penalty rate this year appears to be only 3%,
and you pay the penalty only for the interval between when the
estimate was due and when it was paid. So if we assume the tax is due
in four equal instalments, and he makes the catchup payment on 7/30,
the first payment is 3 1/2 months late, so the penalty is 3.5/12 * 3%
* 1/4 of the amount, and the second payment is 1 1/2 months late so
the penalty is 1.5/12 * 3% * 1/4 of the amount, which sums to 0.31% of
the tax due. (The actual computation is in days, but this should be
pretty close.)
That's not very much money, $3.10 on each $1000 of the tax liability.
He could just elect this year, make a catchup payment and two
timely payments, and pay maybe ten bucks penalty.
R's,
John
--
Regards,
John Levine, jo...@iecc.com, Primary Perpetrator of "The Internet for Dummies",
Please consider the environment before reading this e-mail. http://jl.ly
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