Estimated Tax Payments and Roth Conversions

A reader writes in, asking:

“I was wondering if you’ve discussed taxes on Roth conversions before. Specifically, I’m really confused on whether or not I would need to make estimated tax payments to the IRS. Does it matter when I do the conversion, January vs. December, for instance? Would I make a single estimated payment, or would I have to make four during the year? I do NOT currently make estimated payments. My wife and I file jointly and have taxes withheld from our paychecks and typically may owe a few grand at most in taxes in April.

Maybe a post about estimated taxes in general would be helpful.”

Yes, a Roth conversion could cause you to need to make estimated tax payments.

There are two ways to avoid penalty for underpayment of estimated taxes.

First, you will not owe any penalty if your total tax for the year, minus your withholding, minus your refundable credits is less than $1,000.

Second, you will not owe any penalty if:

1. Over the course of the year, you paid (via withholding and/or estimated tax payments) at least the smaller of:
   • 90% of your total tax for the year or
   • 100% of your total tax for last year (110% if your adjusted gross income from last year was at least $150,000),
2. And your estimated tax payments were each of the required amount and were each made by the applicable deadline.

Estimated Tax Deadlines

The applicable deadlines are April 15, June 15, September 15, and January 15 of the following year. It’s important to note that this isn’t every three months, despite often being referred to as “quarterly” payments. If you make your first payment on April 15, then make your second payment three months later, that second payment is going to be a month late.

Required Amount per Estimated Tax Payment

The required amount for each estimated tax payment is generally 25% of the required annual payment. In other words, if a) you make the same size payment for each of the four estimated tax due dates, b) you make each payment on time, and c) you meet the percentage requirement described above (i.e., 90%, 100%, or 110%), then you won’t owe any penalty.

However, in cases in which your income is earned unevenly throughout the year, the required amount for a given estimated tax payment may be less than 25% of the annual amount.

As a very simplified example, imagine that you have no taxable income whatsoever for the first 11 months of the year. Then in December you do a very large Roth conversion. In such a case, if you make a sufficiently large estimated tax payment by Jan 15 of the following year, you would owe no penalty, despite not having made any estimated tax payment for any of the first three periods.

Form 2210 and its instructions walk you through the details. (Pay particular note to Schedule AI for situations in which income varies considerably throughout the year.)