How to use required minimum distributions for unpaid taxes

If you’re retired and haven’t made the required quarterly estimated tax payments for 2022, there may still be time to avoid late penalties, experts say.

Retirees have to pay taxes four times a year if they don’t have enough withholding from Social Security, pensions, investments, or other sources of income.

However, certain retirees have the ability to correct missed payments through required minimum distributions, or RMDs, paid annually at age 72. (Your RMDs may have already started if you turned 70½ before January 1, 2020.)

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Since there are few opportunities for a turnaround in the tax world, withholding tax is a “good little joker to go back and fix things,” said certified financial planner Marianela Collado, CEO of Tobias Financial Advisors in Plantation, Fla. 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 cover your 2022 RMD, you can estimate the year’s total federal and state tax liability and withhold the funds from your RMD. If you estimate that you still owe $5,000 in taxes to meet your estimated quarterly tax obligations, you can choose to withhold that amount, remit it to the IRS, and withdraw the remaining $70,000.

“People don’t know this, but you could have a 100 percent withholding,” Collado said of filing the entire RMD with the IRS.

You have until December 31 to complete this, and it’s considered “pro-rated” for each quarter, meaning it counts as payments on time to each deadline, explained JoAnn May, a CFP and CPA, of Forest Asset Management in Berwyn , Illinois, established . “It’s a nice thing I do for a lot of my older clients,” she said.

Typically, you can avoid federal penalties by paying 90% of your 2022 taxes year-round or 100% of your 2021 bill, whichever is less, if your adjusted gross income is $150,000 or less. You need 110% of your 2022 bill if you earn more than $150,000.

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

If you pay at least these amounts by each of the deadlines, you will not incur any late payment penalties. The first three deadlines for your estimated quarterly tax payments this year were April 18, June 15, and September 15, and your fourth quarter balance is not due until January 17, 2023.

However, making payments based on last year’s liabilities doesn’t guarantee you won’t owe taxes for 2022. Working with a tax professional may make it easier to estimate exactly how much to set aside before filing taxes in April.