Dear Liz: Your recent column about how to distribute estimated tax payments over the year (equal versus backend loaded) may have missed an important nuance. Your answer regarding the Form 2220 safe harbor is correct and would apply if the taxpayer’s income were retirement fund distributions. As I read the query, however, it’s possible (perhaps likely?) that the year-end distributions are from a taxable brokerage account. In that case, even absent intra-year distributions to the taxpayer, the dividends appearing in the account are deemed constructively received when paid by the portfolio companies into the brokerage account.
I can understand how an IRS agent would simply argue for equal payments. And I similarly understand that a competent accountant would know the safe harbor rules. It’s impossible to know which of them is correct here from the letter as printed.
Answer: My answer relied on guidance from Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, and he says that you have a point.
The original writer stated that they received the majority of their income at the end of the year, and most of it was dividends from their brokerage account. The writer had been told by an IRS agent that estimated tax payments were due throughout the year, while the writer’s accountant contended that wasn’t necessary. The writer didn’t specify whether it was a taxable or retirement account or when the dividends were actually paid into the account.
Luscombe assumed that the dividends were received at the end of the year, but the writer could have meant that dividends were only withdrawn then.
If the account is a qualified retirement brokerage account, it wouldn’t matter when the dividends were paid, only when the withdrawal was made, Luscombe notes. If it’s a taxable account receiving dividends throughout the year, then the IRS agent would be correct that the dividends would be taxable based on when they were received into the account.