I normally do not owe federal income taxes due to my income being from dividends and capital gains of roughly $40,000 a year.
However, I am transitioning now to where I will be taking significant withdrawals from a pre-tax IRA, beginning in the 4th quarter or 2025. Also, I will have a large jump in capital gains for the 4th quarter, from liquidating stock in my taxable investment portfolio. Thus, for 2025, I will have the usual $10,000 in dividends and capital gains for each of the four quarters, and in the fourth quarter I will also have roughly an additional $85,000 in capital gains and $70,000 in an IRA distribution. So the income by quarter will be $10,000, $10,000, $10,000, and $165,000.
I have heard that Schedule AI of Form 2210 will allow me to annualize my income, to tell the IRS that certain income was received in particular quarters.
I have never filed estimated taxes with the IRS, due to the fact I have benefitted from the preferential treatment of dividends and long term capital gains. I was on the ACA until this year, and sometimes I had to pay a penalty for exceeding the income I told the IRS I would have. In 2024, I paid $950. But I haven't actually been paying tax.
I plan to pay estimated tax by Jan 15, 2026 on the jump in income for the 4th quarter. My tax payment due for 2025 will work out to about $26,000. I suppose I will pay the entire tax bill for 2025 at that time. Assuming that I can avoid a penalty for not paying taxes on the large jump in income in the 4th quarter, my concern and question is, will the fact that the $10,000 per quarter is normally not taxed be taken into account due to the source of the income, or might I be penalized for not paying estimated taxes in the first three quarters?
Thank you for any advice.
Don
Using IRS form 2210 to annualize income due to large late-in-tax year IRA distribution
byu/LateForBreaks intax
Posted by LateForBreaks
2 Comments
>To compute the tax, see the instructions for your tax return for the applicable Tax Table or worksheet to use. For example, Form 1040 or 1040-SR filers can use the Tax Table; Tax Computation Worksheet; Qualified Dividends and Capital Gain Tax Worksheet; Schedule D Tax Worksheet; Foreign Earned Income Tax Worksheet; Schedule J; or Form 8615, Tax for Certain Children Who Have Unearned Income.
[https://www.irs.gov/pub/irs-pdf/i2210.pdf](https://www.irs.gov/pub/irs-pdf/i2210.pdf)
You would compute the tax on the annualized amounts.
Withholding is automatically treated as being paid on time. If you can pay what you need through withholding (from your IRA distribution since that’s your only source that can be withheld from), you won’t have to worry about making estimated tax payments or using Form 2210: Schedule AI.
The easiest way to avoid the penalty is to make sure you meet one of the safe harbors from the underpayment penalty. The one that would seem to be most advantageous in your situation is to withhold enough to cover your tax liability (including the PTC repayment) from 2024. If that was $950, having that amount withheld from your IRA distribution in 2025 will allow you to avoid the underpayment penalty. You could the pay the rest of the balance due before the April 15th deadline.
If you want to go ahead and pay what you think you’re going to owe, you can have them withhold the full $26k from your IRA distribution.