Estimated Tax Payments

[Guest banderson4]

Assume $400,000 is converted from a traditional IRA to a Roth IRA in 1998. This means that $100,000 will be included in income for 1998,1999,2000 and 2001. For federal income tax purposes, can the income be considered to be received uniformly over the three years following 1998, so that estimated taxes are paid each quarter on 1/4 of the income. Or, must the income be considered as all received in the first quarter of these years, so all the estimated tax on the $100,000 will be paid in the first quarter of each year?

[Guest JSchmitz]

That is my question too, I can't believe this isn't explained in any literature I've read. In short, when is tax due for a conversion, both for the original year and the subsequent three years. Should it be broken down by quarter, or can you just wait until Income tax time (April 15) to pay 1/4 of total and not worry about estimated payments. Someone please help!!!!

Jeff

[Guest banderson4]

I've asked this question in several different forums, including to the IRS, and still do not have an answer. I made my conversion to a Roth IRA during the last quarter of 1998. Therefore, I'll handle the tax for the 1998 portion of the income by paying an estimated tax on it before January 15, 1999. However, I do not yet know if I must pay an estimated tax on the entire portion of the 1999 income in my estimated tax paid by April 15, 1999. If I do not get a definitive answer by that time, that is the way I'll handle it.

Bill

[Guest TRothwell]

Without knowledge of this MB, I asked my CPA this same line of questions today. He did not know the answer, but presumes that quarterly estimates are required. Would much appreciate a response to the question from an authority on the subject.

Thanks,

Tom

[Guest John R Grossmann]

CPA HELP NEEDED. I haven't found any info on how a Roth conversion affects the timing of estimated tax payments. I can surely speculate one some of the options. Your tax timing could be based upon the Qtr of the conversion, which could be complicated if you converted on multiple dates. A un-reconvert could shift you tax timing to a later Qtr. I can make a pretty good case for April 15 (or as extended) since this is the date that you can not revoke your Roth conversion. If you recall, earlier in the 90s tax payers in the highest bracket were given a three year period to pay a tax increase, a payment that only had to be made on April 15. My CPA doesn't know the answer on this one yet. Help!

[This message has been edited by John R Grossmann (edited 01-11-99).]

[Guest banderson4]

Since I was in a hurry to get my original message in before I got an internet disconnect, I did not make my original question as clear as it should have been.

I know how to handle the tax payment for 1998. I made my conversion in October, 1998, so I will figure my tax on an annualized basis and make my estimated tax payment by January 15, 1999. I do not have any tax withholdings.

It is the 1999, 2000 and 2001 tax payments that I am not sure about. Since the tax on the IRA conversion amount is to be spread over 4 years, one might assume that the 1999, 2000 and 2001 portion of the conversion amount is spread uniformly over these years, and thus would be paid in four quarterly payments each year. On the other hand, one might assume that the IRA conversion amount for each of these years was to be included in the income for the first quarter of these years, and then estimated taxes calculated on an annualized basis would make the tax due on this amount due in the first quarter of each year.

[Guest John R Grossmann]

Just a short note to bump up the date (and priority) of this thread topic. Jan 15 is a key estimated payment date -- Roth converters could use some CPA guidance as to how IRS expects taxes on conversions to be paid.

[Guest banderson4]

Several weeks ago, I posted a question at the IRS web site (http://www.irs.ustreas.gov/prod/help/newmail/user.html) which stated the following:

"I converted $400,000 from a traditional IRA to a Roth IRA in the 4th quarter of 1998. I will pay the tax on $100,000 of this transfer before January 15, 1999. I have no tax withholding from any income, and I will make estimated tax payments for $100,000 of this income in each of the next three years. My question is can the $100,000 for each of the next three years be considered to be received uniformly over each year, so that estimated taxes are paid each quarter on 1/4 of that year's $100,000 income. Or, must the income be considered as received in the first quarter of each of these years, so that all the estimated tax on that year's $100,000 will be paid in the first quarter of each year."

I received the following response from the IRS:

"The income will be considered to have been received uniformly over the year so that you will make 4 estimated tax payments on the income."