How to use a required minimum distribution for unpaid quarterly taxes

If you’re retired and skipped your 2022 tax payments, you can still avoid late penalties with an under-the-radar year-end strategy, experts say.

Since taxes are due as you receive income, you must withhold levies from earnings or pay quarterly estimated tax payments. You may owe quarterly taxes if you didn’t withhold enough from Social Security, pensions or other income.

But if you missed paying quarterly taxes, you can correct that mistake through your year-end required minimum distribution, or RMD, which currently begins at age 72. RMDs may have already started if you turned 70½ before Jan. 1, 2020.

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With few chances for a do-over in the tax world, the withholding is a “good little wild card to go back and fix things,” said certified financial planner Marianela Collado, CEO of Tobias Financial Advisors in Plantation, Florida. She is also a certified public accountant.

For example, if you need to withdraw $75,000 from an individual retirement account by year-end to satisfy your RMD for 2022, you can estimate the year’s total federal and state tax liability and withhold the funds from your RMD. If you estimated you still owed $5,000 in taxes to meet quarterly estimated tax obligations, you could opt to withhold that amount, remit it to the IRS and receive the remaining $70,000 withdrawal.

“People don’t know this, but you could have a 100% withholding” by sending the entire RMD to the IRS, Collado said.

You can complete this by Dec. 31, and it’s considered “pro rata” for each quarter, meaning it counts as on-time payments made by each deadline, explained JoAnn May, a CFP and CPA who founded Forest Asset Management in Berwyn, Illinois. “That’s a nice thing that I do for a lot of my older clients,” she said.

Typically, you can avoid federal penalties by paying, throughout the year, the lesser of 90% of your 2022 taxes or 100% of your 2021 bill if your adjusted gross income is $150,000 or less (110% if you made more than $150,000).

You can base payments on your income each quarter or check your 2021 return for last year’s tax liability and divide that number into four equal payments.

By paying at least these amounts by each of the deadlines, you won’t incur late payment penalties. The first three deadlines for quarterly estimated tax payments this year were April 18, June 15 and Sept. 15, and the fourth-quarter balance isn’t due until Jan. 17, 2023.

However, making payments based on last year’s liability isn’t a guarantee you won’t owe taxes for 2022. By working with a tax professional, it may be easier to gauge exactly how much to set aside before filing taxes in April.