I’ve been serving as the executor of my late mom’s estate for the past 10 years. Things are finally winding down. (Thank goodness!) The last big distributions have gone out to the heirs (including myself). My mom’s will did not mention any executor’s commission, but New York State law allows me to take a fee (based on a defined formula, of course), so before the final distributions were calculated I subtracted my commission from the estate’s total assets and added it to my distribution in a lump sum.
The distribution portion is tax exempt, but the commission, I understand, is not. That gives me a little over $30,000 of unexpected extra income – with no witholdings taken out from it – for the year 2013. This, btw, will almost double my taxable income for the year.
I have two tax concerns, and I hope some informed Dopers can give me a little guidance and advice. I realize you are not my CPA, lawyer, tax preparer or other such agent or representative.
My first concern regards estimated taxes. Should I send the IRS some bucks right now (or before September 15)? If so, how much? Won’t it look fishy that I sent in a bunch of cash at the end of the year, but nothing earlier. Or does this sort of thing happen all the time and they won’t bat an eye? Do I use the quarterly forms I used to use back when I was self-employed?
My second concern regards the overall tax hit I will take because of this extra income. Are there strategies I can use to minimize it? I don’t need to use/spend/access the money so if there are ways to “shelter” it (pardon a poor man for using a rich man’s word), let me hear them!
Lastly, if you have any other words of wisdom regarding aspects of my situation that I have not raised, please do not hesitate to share them.
Was your taxable income in 2012 less than $150,000?
Will the amount of withholding from all sources (including your day job) in 2013 be at least as much as the total tax listed on your 2012 tax return?
If you can answer yes to both the above questions, forget about estimated taxes. You don’t have to pay any.
Otherwise, was your taxable income in 2012 more than $150,000?
Will the amount of withholding from all sources (including your day job) in 2013 be at least 110% the total tax listed on your 2012 tax return?
If you can answer yes to both the above questions, forget about estimated taxes. You don’t have to pay any.
If neither of the above applies, answer back and we can get into more detail.
Of course, if you are the sort that instantly burns through any money that lands in your checking account and will be living hand to mouth by the end of the year, then maybe you would want to make a voluntary estimated tax payment. But if you have any money management skills, it’s not necessary.
If you have a day job, are you maxing out your 401(k) or other retirement plan? Have you made the maximum contribution to an IRA?
If you plan to have less income next year, try to accelerate any deductions into this year (assuming you can itemize). Make your 2014 charitable contributions in 2013.
Note: The above are the rules for federal estimated taxes. I do not know what state you are in and so cannot comment on your state estimated taxes.
The official line on estimated taxes is that you are supposed to pay them for the quarter in which the money is earned (or received in your case). So if you get your 30K prior to 9/30, you should remit the taxes on whatever the quarterly date is after that (10/15?).
The reality is that as long as you remit them by the end of the year, IRS is probably not going to get too snippy about penalties.
And as Alley Dweller says, penalties won’t apply anyway in most situations (as long as you had enough withheld to cover last year’s bill, etc.).
As far as minimizing the hit: I concur that you absolutely should max out any 401(k) you have access to. You can’t make the whole 30K disappear but you can make a lot of it go away. I forget what the limits are (16,500 or something), and your employer may well have ceilings on the percentage you can put aside, but consider maxing it out to the point where your take-home is practically nothing, then live on the 30K cash for the rest of the year.
You can also put some of the remaining money (5500?) into an IRA; I’d personally suggest a Roth vs. traditional because the income tax on 5500 dollars is not that much at your income level, and it’ll keep you from ever paying taxes on the gains.
If you are eligible for a deduction this year when you are in a higher tax bracket, you can take the deduction this year. Then next year when you are in a lower tax bracket, you can convert to a Roth IRA and pay the tax at a lower rate.
Note that you can make 2013 contributions as late as April 15, 2014, so you can do some “what-if” scenarios to decide which is better.
If your workplace offers a Roth 401(k) option (most don’t), I wonder if the same thing might be done there… I don’t know if I could do that within mine or not.
As others have pointed out, you are likely not required to file any estimated tax payments as long as your current year federal withholding will be at least 100% of your prior year federal tax.
A few more notes - the Executor’s fees you received are likely not self-employment income to you, since you are not in the trade or business of being an executor, and should be reported as other income not subject to self-employment tax on line 21 of Form 1040.
Also, I do not know whether you itemize deductions or not, but if you do, one thing to consider would be making an estimated payment for additional NY state taxes you will owe on the additional income by 12/31/13. While not required, if you itemize, you can include the state estimated payment in your itemized deductions in 2013 to help lower your federal taxable income. Note that state tax payments cannot be deducted for state income tax purposes and are also an add back for Alternative Minimum Tax purposes on Federal (though it is unlikely you will be in AMT if all you have is a W-2 job and the executor fees and normal itemized deductions).
If you wait and pay your higher NY state tax bill in 2014, those taxes will not be able to be included as an itemized deduction until your 2014 tax return, when your income might be much lower than in 2013 and you would receive less of a tax benefit.
Of course if you do not itemize, you can ignore all of that
Just occurred to me: one of the things with a Roth conversion is you pay taxes on the gains on the money. Say you put aside 5,000 in a pretax IRA, and it’s grown to 6,000 dollars. You have to pay the tax on 6,000 of income. If there’s a short enough time between the contribution and the conversion, there’s not going to be a lot of growth.
So in that 5,000 example, if you did the pretax contribution on April 15, 2014 (for FY 2013), then did the conversion on April 16th, you’d only have a few pennies of growth.
And conversely, if your investment shrinks to $4000, you’ll only pay tax on $4000 at the time of conversion.
If you know of an investment that is certain to grow by 20% over the next 6 months or so, it would be foolish to avoid it just to avoid paying taxes on the growth. You will really come out ahead after taxes if you let it grow (and, by the way, please tell me what this investment is!).
And you don’t have to do the whole conversion at once. If paying tax on the extra $1000 would be an undue burden, you can convert only $5000 and wait until a future time to convert the remaining $1000 (or just never convert it).
LOL! Yes, if you can be sure of it growing that much in 6 months!!! I was using that as hypothetical of course - I had some investments that weren’t worth that much more after 10 years.
The better way of reading that is, if you’re going to wait until next spring to make th contribution any way, and DO plan on making the conversion, do the conversion as quickly as possible. Obviously, all depending on what you decide is best for your situation.
Are the other heirs cool with you taking the commission?
I’ve had to counsel a number of distrait women over the issues of some family member getting some special piece of tat that was promised to her. OMG! The tears, the blaming the not speaking to each other for decades.
That was for tat. And now you’re talking about $30K.
You may find some of the other heirs thinking you cheated them out of real money. Even though what you did was legal, there’s someone out there that will find out and say “stuyguy should have done the work for his love of his mother. Not for money.”
Just sayin’, your problems may not be what to do with the money. And when it comes to inheritances and money, people aren’t rational.
