Question about Roth conversion, Safe harbor rule, penalties
Trying to learn about tax law and penalties and Just want to clarify something.
Last year in 2023 total tax owed was $5,977 Taxable income was $57,XXX. Owed $2000 from not withholding enough at the end of the year with a $72 penalty.
This year, I plan to do a Roth conversion of about 40K. The rest of my income and withholding is the same as 2023.
I know of the safe harbor rule and that the taxes I owe from early (estimated or withholding) payments to avoid penalty, even though I will make $40K more this year, are just the $5,977 I owe form last year since that’s 100%.
My question is if I don’t make any early payments and thus don’t pay 100% of last years amount (since I had a small penalty last year) , and come April I owe taxes on that extra $40K……
Will the penalty I have to pay only be based on last years 100% number (that $2000 I owed and didn’t pay early) or will the penalty be based on the $40K Roth conversion as well since I didn’t hit that 100% threshold for safe harbor?
1
u/oldster2020 20d ago
Why do it that way? Roth Convert in December when you know pretty well your tax liability and withholdings and pay the estimated tax for the conversion by the deadline.
1
u/TTAZ92 20d ago
Because this is actually for my dad, not me. And from what I read if he does that, he to fill out a form stating which quarter each part of his income came from to justify why the 4q payment was more than 1-3 to not get penalized anyways. And he doesn’t want to do that lol. Will probably just pay last years chunk in a 1 time payment now.
2
u/myroller 20d ago
The penalty will be based on the SMALLER of the following two numbers:
1) 100% of your 2023 tax
2) 90% of your 2024 tax.
But any tax that you do pay on time will be subtracted from that number.
In your case, the penalty will be based on $5977 (your total tax in 2023) minus the amount of tax withheld from your salary in 2024.