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Q&A: Timing matters with estimated tax payments

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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that the dividends were received at the end of the year, but the writer could have meant that dividends were only withdrawn then.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.

Q&A: Are IRS quarterly payments mandatory?

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Dear Liz: I live totally on my investment income. I receive the majority of my income at the end of the year, mostly dividends from my brokerage account.

A couple of years ago, when talking to an IRS agent about another matter, I asked when I should make my estimated tax payment. I was told that I had to make the payments quarterly. This year, when I was talking to my accountant, she told me that I could make a lump-sum payment at the end of the year without incurring a penalty. Who is correct, the IRS agent or my accountant?

Answer: Ours is a pay-as-you-go system, and the IRS assumes that your income is received evenly throughout the year, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Therefore, the agency typically expects four estimated tax payments of roughly equal size, with the payments due April 15, June 15, Sept. 15 and Jan. 15. If the payments aren’t made as expected, you can get hit with an underpayment penalty.

However, the IRS allows a taxpayer to show that their income is not earned equally throughout the year by filing a Form 2210 with a related Schedule AI (Annualized Income Installment Method), Luscombe says. Schedule AI allows you to show when income was earned during the year so you can match your estimated payment dates to when you actually received the money.

Schedule AI is more work, since it requires you to report adjusted gross income for each of the four quarters, as well as your itemized deductions and other tax details items, Luscombe notes. But if your income comes at the end of the year and the corresponding estimated tax payment was made on Jan. 15 of the following year, filing this paperwork may be sufficient to avoid a penalty for underpaying estimated taxes, he says.

Q&A: How do I get tax forms from my online bank?

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Dear Liz: I have a savings account and a revocable trust money market account with an online bank. They provide the 1099-INT tax form for the savings account as a downloadable file. However, they do not provide a downloadable form for the trust account money market.

They insist that it can only be mailed after Jan. 31 and cannot be downloaded online. When I complained several times, saying that I received trust account tax forms from other financial institutions, I received frivolous answers.

Can you explain what is going on here and what I should do to get my 1099-INT early so I can do my taxes without having to wait for it?

Answer: What’s going on is that the bank and its customer service reps are ignorant of the law.

There’s no requirement that the form be downloadable, but the Internal Revenue Service does require 1099-INT forms to be provided to recipients and to the IRS by Jan. 31, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. This year, the deadline was actually Feb. 2, since Jan. 31 fell on a weekend.

Since the IRS can levy penalties for late filing, you can be sure the bank has found a way to electronically provide the forms to the tax authorities, even if it can’t be bothered to get them to you.

As you’ve personally experienced, other financial institutions give their customers access to the forms well before the deadline. You can’t personally reform a dysfunctional institution, so consider moving your business to one that provides actual customer service.

Q&A: Foreign tax credit delays substantial IRS refund

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Dear Liz: My tax professional submitted amended tax returns for 2023, 2022 and 2021 a year ago. I’m supposed to receive a nice refund for those years but I have heard nothing from the IRS and cannot get any information from its website. I asked my tax professional about it and she said the foreign tax credit claimed on the amended returns must be reviewed by the foreign tax department, which is very far behind. This just feels like a black hole. The IRS wants me to pay my taxes but drags its feet on giving me my refund.

Answer: The foreign tax credit is designed to prevent double taxation. If you earn income abroad, you may be able to deduct taxes paid to another country on your U.S. tax return.

Unfortunately, this is an area where there has been substantial fraud and noncompliance. That raises the odds of a manual review and potential audit. The fact that you’re claiming large refunds, and doing so by amending returns, also increases the chance your filings will be scrutinized.

Still, a year is a long time to wait. Consider reaching out to the Taxpayer Advocate Service, which may be able to help you break the logjam.

Q&A: IRS tax payment problem can be frustrating to fix

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Dear Liz: In a recent column, you advised people to pay IRS tax bills online. Have you done this yourself? The wording of the choices to click on can be confusing. I tried to help my son pay online last year. We evidently chose the wrong type of tax and it went to “la la land.” He got late letters and fines. It took quite a while to get it rectified because you are on hold for HOURS. Who has time for that? Next year I’ll have him mail it and take our chances.

Answer: I’ve made exactly the mistake you describe and am aware of how frustrating it can be trying to get the situation rectified. But dealing with mail theft and check fraud is frustrating too.

Both of us would have benefited from consulting a tax pro first to ensure we were clicking the right buttons. A tax pro can also help in straightening out a snafu. The IRS was understaffed and struggling to answer its phones even before the government shutdown, but the dedicated number for tax pros often has shorter wait times than the one for the general public.

Q&A: Future mate hasn’t filed tax returns. Am I liable?

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Dear Liz: I’m engaged to someone who just confessed that they have not filed tax returns for the last several years. How do we fix this? If they owe a lot of money, could the IRS come after me if we’re married?

Answer: Technically, debts incurred before marriage are considered separate. But there are many ways premarital debt can affect postmarital life.

If you live in a community property state, for example, creditors could come after jointly owned assets if your spouse fails to pay what they owe. Your spouse’s debt could affect how much you two can borrow if you want to apply for a mortgage or other joint obligation. And the money your spouse uses to pay off the debt isn’t available for other uses that could benefit both of you. That could include everything from paying bills to going on vacation to saving for retirement.

The IRS is not a good creditor to have, in case you had any doubts. The agency has many enforcement powers, such as withholding refunds, taking part of someone’s paycheck and seizing property to pay debts. Consider working with a tax pro to get the missing returns filed as quickly as possible. The IRS also offers payment plans for those who can’t pay in full.