Estimated Taxes on Dividends and Interest Income

Forum|Forum|11 months ago
April 12, 2025
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Do we need to pay quarterly estimated taxes on dividend and interest income received throughout the year? Through March 31, we have about $1900 in dividend and interest income received in the first quarter of 2025. Do we need to make an estimated tax payment by April 15?

My wife and I are both retired collecting pensions that have Federal and State Income Tax withheld. We are not yet collecting Social Security. Thank you.

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PaulaM

Employee

Maybe. See this article to determine if you may need to make estimated payments.

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CJB-1959Author

Thank you. The issue I have faced the last two years is the fact that I have done a Roth IRA Conversion late in the calendar year that has significantly increased our Gross Income which had no Federal or State Income tax withheld. Last year I "annualized" my income which led to a significantly lower estimated tax penalty.

Opus 17

Employee

@CJB-1959 wrote:

Thank you. The issue I have faced the last two years is the fact that I have done a Roth IRA Conversion late in the calendar year that has significantly increased our Gross Income which had no Federal or State Income tax withheld. Last year I "annualized" my income which led to a significantly lower estimated tax penalty.

Generally, the IRS assumes that any income reported on a 1099 (including a Roth conversion, interest or dividends) was spread out over the year. The IRS wants to see your tax payments also spread out over the year. If you have a lump sum of income, you can use the annualized income method to show that your income was uneven, and your payments in each quarter were appropriate for your income.

You can get those evenly spread out payments by making payments, or by increasing your W-2 withholding (if you are working) or by having withholding from your 1099 income, since withholding is also assumed to be spread out over the year.

This gives you two interesting options for Roth conversions specifically.

1. Convert in the first quarter, not the end of the year. Here the "spread out" assumption works in your favor. Suppose you convert $40,000 in March and expect to owe $10,000 in taxes. Instead of making a payment of $10,000 by April 15 (the first quarter) you can pay $2500 in each quarter (April 15, June 15, Sept 15 and Jan 15) and it will be considered "evenly spread out" and not trigger a penalty.

2. Have taxes withheld from your conversion. If you convert $40,000, and you have $10,000 in the bank somewhere to make the tax payment, instead do this: Convert $40,000 and have $10,000 withheld. Since both the income and the withholding are considered to be "spread out" (even though they are not) there is no penalty trigger. Then, to complete the conversion, take $10,000 from someplace else, put it in the Roth IRA within 60 days of the conversion, and tell the Roth IRA it is a rollover. The Roth IRA does not need to know and does not care where the money came from, that's between you and the IRS. As long as you make up the withholding within 60 days, it counts as part of the conversion on your tax return.