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On April 30, Kitces posted an comprehensive article regarding the Tax Cuts and Jobs Act (TCJA) describing in detail where the congress is currently at and what steps are necessary to extend and/or change the the TCJA before the current tax law sunsets at the end of 2025.
I agree with the conclusion of the article to currently “wait and see” before taking action until I have a concrete expectation of what the individual income tax rules will look like in 2026. For me that means I plan to delay any traditional to Roth conversions and, as I have earned income for 2025, I will wait until 2026 to decide to fund any 2025 traditional or Roth IRA.
The one action I am doing is to have sufficient 2025 federal income tax and estimated tax payment paid in to protect us from the possibility of underpayment penalty based on the safe harbor rule determined using our 2024 adjusted gross income and 2024 tax liability.
Any other tax actions you are planning to take during 2025?
Bill, thanks for your post. About this paragraph:
The one action I am doing is to have sufficient 2025 federal income tax and estimated tax payment paid in to protect us from the possibility of underpayment penalty based on the safe harbor rule determined using our 2024 adjusted gross income and 2024 tax liability.
Is there some relationship between the safe harbor rule and what happens with the TCJA? My impression is that the safe harbor provision is something we estimated tax payers rely on every year regardless, but you have me wondering if I’m missing something?
Thanks as always for your expertise.
There is not a direct relationship between the safe harbor rules and what happens with the TCJA.
If the combination of the final tax rules, rates and brackets in 2026, my own actual taxable income for the rest of 2025 and the overall 2025 economic conditions causes me to accelerate income into 2025 or not to make 2025 tax deductible tax expenditures, like traditional IRA contributions for 2025, then I expect my 2025 tax liability will be higher. As such, I need to have made sufficient timely tax payments through a combination of federal withholding and estimated tax payments to avoid underpayment penalty.
The tax safe harbor rules for 2025 to avoid possible underpayment penalty are the following as I understand them-
If you owe a balance of less than $1,000 in tax for the current tax year after subtracting your withholding and refundable credits from your total current year tax liabilities then no underpayment penalty. Note any estimated tax payments are not included in this rule.
or
You expect your withholding, refundable credits and timely equal quarterly estimated tax payment to be more than the smaller of-
Then there is no underpayment penalty.
It is important to remember that federal income withholding is effectively deemed to have been paid equally throughout the year where estimated tax payments are paid when delivered to the IRS. I have avoided arguments with the IRS about when delivery occurred by paying my ES payments via direct pay from my bank account and getting immediate confirmation.
I expect one of the reasons others have commented about deciding to fund their tax payments through late in the year federal income tax withholding rather than estimated tax payments is avoiding underpayment penalties in our pay as you go federal tax system.
The underpayment penalty grows with the size of the shortfall between your tax liability and what you have timely paid in and the calculation is made on a quarterly basis (whose quarterly periods do not follow the calendar, think 4/15, 6/15, 9/15, EOY). See IRS form 2210 and instructions to determine if you meet one of the exceptions to all or part of the penalty. Alternatively, some taxpayers may choose to do nothing and the IRS will bill you for any underpayment penalty based on the information they already have after your return is filed. If you are using a professional tax preparer most software has a box to check to suppress calculation of the penalty and let the IRS calculate the penalty and bill you. You can instruct your preparer to check the box. The assumptions preparers make about when you actual pay the balance due with your 1040 can affect the actual underpayment penalty due so the payment date the preparer inputs or the default date of the due date of the return that most tax software use can and does cause differences in calculated penalty between the preparers calculation and the IRS calculation. IRS calculation wins.
Other exceptions to the underpayment penalty rules may apply such as if you live is a federally declared disaster area.
If you do not have a late in the year income source from which you can withhold income tax from, a payment of a sufficient estimated tax payment to meet the safe harbor rules will keep the underpayment penalty from growing larger but not eliminate it.
There are also other more complex exceptions to underpayment penalty based on factors such as when in the year you earn the income and also the taxpayer can determine when in the year their actual federal tax withholding (FWT) occurred and if a large part of your FWT occurred early in the year that may be beneficial to reducing the underpayment penalty.
If your income and actual withholding varied during the year and your penalty is reduced or eliminated when figured using the annualized income installment method you must figure the penalty using Schedule Al and file Form 2210. I can only recall a few times in my career as a preparer when the time and cost of using the annualized income method on form 2210 was justified by the reduction in underpayment penalty.
Writing this reminds me of why I always like to meet the tax safe harbor. I hope this helps.
Best, Bill
Bill, thanks for your very detailed reply and information.
We have no withholding and pre-pay exclusively via the quarterly estimated payments. I never try to predict with certainty what our current year taxes will be and instead always rely on making payments based on the prior year’s tax.
2024 Tax Year 1040 produced my first Tax Refund in over a decade…$7,220, including my State $485.00.
I am currently having 10% with held from our Social Security Benefits monthly. This is in lieu of quarterly tax payments.
Because our income consists of SS Benefits and Income Tax Free Annuity Income, (derived from Roth Dollars,) I anticipate being in the 12% bracket this year, and most likely getting another refund.
Personally, I don’t believe Congress will fail to act in time, as it would result in massive backlash against incumbent legislators, and we all know the number one job of a Congressperson is to get reelected.
IF I consider a Roth Conversion this year, I have estimated a $50,000 conversion would cost me @$3,000 in income taxes, but I am not sure making additional conversions makes sense for us.
Like most of HD readers, wait and see makes sense to me.
Thanks for posting the article Bill. For now I won’t do anything differently. I did make a Roth conversion during last month’s downturn, but not the full amount I potentially might by year end. For the rest we’ll see how the year goes.
I don’t make quarterly payments. Later in the year I project what our tax liability will be and adjust withholding in the last few months to cover it. I plan to do the same this year.
I’ll just wait until December and do a tax with-holding withdrawal from my IRA based on the income and tax landscape at that time.
This is the first year I didn’t apply our federal tax refund to 2025. I’m okay with playing it close this year.
I’m playing it by ear with another IRA to ROTH conversion. If the market takes another big “dump” I might do it then.
Your planning seems reasonable to me. I am being sure that I have timely adequate taxes paid in for 2025. The July – December 2024 underpayment penalty rate was 8% and dropped to 7% for the first two quarters of 2025. That rate can change quarterly but I don’t want to incur a 7% penalty when my safe cash reserves are paying 4.2%.
William, I reside in the 12% marginal tax bracket, I don’t feel like there’s much to worry about. TCJA did not have a great impact on my taxes.
If my marginal tax rate was higher, my thought process may be different, especially regarding Roth conversions.
At the end of the day I don’t think our legislators have a death wish, figuratively speaking of course, so I don’t see my taxes increasing.
Having said that, my mind is open to other opinions.
I expect our taxable income to also fall in the 12% MFJ bracket in 2025 but because I waited to age 70 to claim my social security benefit combined with our other sources of income every additional dollar of ordinary income currently causes an additional $0.85 of my social security benefit to become taxable thus my expected 2025 marginal rate is 22.2% (12% x 1.85).
At a 22.2% marginal 2025 tax rate I find it hard to not minimize taxable income when I can choose to avoid additional 2025 taxable income by making a traditional IRA contribution or not making a 2025 traditional IRA to Roth conversion. I currently have sufficient income to meet our needs, most reasonable wants and I have rainy day reserves for most unexpected expenses.
I know future traditional IRA distributions will be taxable income to me (or my heirs) but right now I project I will have a smaller taxable income in future years when I decide or I am unable to continue have earned income. Were I in poor health I would likely to take actions to recognize the income and pay the taxes.
Keep in mind once you get over that hump (or “torpedo” as it’s known) by having all your Social Security taxed, you can go back to the 12% marginal rate. Might be worth doing enough Roth conversions to get through the 22.2% and to the top of the (2nd) 12% rate. Typically the next marginal rate is 27%, which includes 15% for qualified dividends & long-term capital gains.
I will likely choose to realize additional 2025 income only if it looks like the congress will fail to extend the TCJA individual provisions into 2026 and going forward. I have marked Canada’s Boxing day, 12/26/2025, on my calendar as my decision day to pull the trigger in 2025 if I need to take action. The other major event which could cause me to accelerate income to 2025 is a death or a change to a poor expected lifespan for either myself or my wife. Otherwise, our expected joint lifespan now favors us being patience and using a long runway time wise for Roth contributions / conversions. I have sufficient 2025 earned income that I can choose to do either or both.
I certainly wish I had made more Roth contributions / conversions prior to claiming social security but that decision is in the rear view mirror.
Thanks for your comment.
Thanks Bill. I haven’t had a chance to read the article yet, but I always find his articles very informative I’ll report back if I think of anything useful.
The Michael Kitces website tax articles always seems to be written for those who like to read a detailed review of the topic being discussed in factual context. I look forward to reading any comments you currently have and future comments when additional decisions have been made by our congress on 2026 tax rules.