Learn How to Beat 2025 Estimated Tax Penalties Instantly, Today

Learn How to Beat 2025 Estimated Tax Penalties

Let’s say you made no estimated tax payments for the year.

Your tax pro told you to pay $25,000 with each of the four installments. But you have done nothing as of October 1.

Bad you—now you are in the penalty box. If you don’t do something special, you will pay a 7 percent non-deductible penalty on the underpaid amounts.

Example. Your April 15, 2025, penalty will be $1,812.53 if you pay it on April 15, 2026, when you file your return, which is actually 7.25 percent of the original payment because the penalty is compounded daily.

And consider this: in the 30 percent tax bracket, that penalty is about 10 percent compared to interest that’s deductible.

Can I Cure the Problem If I Write a Check or Make an Electronic Payment Today That Covers All of the Underpayments?

No. Remember, you are in the penalty box. Because you are in the penalty box:

• A cash or check payment today does not make the previous underpayment of estimate tax penalties go away.

• But making a cash or check payment today that covers the prior estimates stops the growth of the penalties as of today.

Here’s good news: There’s one perfect way to make the underpayment of estimated tax penalty disappear today.

One Perfect Way to Disappear the Underpayment of Estimated Tax Penalty

To make the underpayment of estimated tax penalty disappear, you need:

• A retirement plan that allows the 60-day rollover

• Available moneys to repay the rollover

Example. You need to pay $100,000 in estimated taxes to avoid the estimated tax penalty. As you read this, you failed to pay the April 15, June 15, and September 15 installments totaling $75,000. You are in the penalty box for each of those installments and you can’t catch up by paying them now.

Here’s the solution: You withdraw $100,000 from your IRA and have the custodian withhold and pay the IRS $100,000 in federal income tax withholding. Then, within 60 days, you repay the IRA $100,000 using funds from your investment account.

Here’s what just happened:

1. You have no estimated tax penalty. You can treat the $100,000 of taxes withheld from your IRA as estimated tax payments paid at the rate of $25,000 on each of the due dates: April 15, June 15, September 15, and January 15.

2. You did not increase your taxes or incur any penalties by taking out the $100,000 from the IRA, because you repaid it within 60 days under the rollover rules.

Other Things to Know About the One Perfect Way

Plans that are eligible for the 60-day rollover strategy include the following:

• Traditional IRA

• Roth IRA

• SEP IRA

• SIMPLE IRA

• 401(k)

• 403(b)

• 457(b)

For all the IRAs listed above, there is a one-year rule. The tax code limits you to one 60-day rollover for all of your IRAs. With minor planning, this is not an obstacle.

For the 401(k), 403(b), and 457(b) plans, there is no one-year restriction.

Key point. The one perfect way works for everyone, regardless of age, providing you have (a) a rollover-eligible plan and (b) cash funds to repay the rollover.

RMDs—Another Possibly Perfect Plan, but Not for Everyone

If you’re age 73 or older, you must take your required minimum distribution (RMD) by year-end anyway. Electing to have federal taxes withheld from your RMD can simultaneously satisfy the withdrawal requirement and catch up on estimated tax requirements. With this method:

• You meet your annual RMD requirement.

• You might seamlessly cover your estimated tax obligations without separate estimated payments.

• You reduce the risk of penalties for late or insufficient estimated payments.

W-2 Bonus: A Bad Plan

Federal income tax withholding counts as estimated tax payments, spread equally across the four due dates—unless you can show when the withholding actually happened, in which case you can choose to treat it as paid on those specific dates.

On the surface, this sounds like a great idea for the “giving yourself a bonus and then paying your estimated taxes with the bonus” strategy. But it’s a bad idea.

Example. You operate your business as an S corporation, and you are going to be $100,000 short on estimated tax payments. You pay yourself a $100,000 bonus today and have the corporation withhold all of it (after payroll taxes) as withheld wages.

You already know why this is bad. You saw the two bad words in the example: “payroll taxes.” And they are bad for two reasons:

1. Payroll taxes are expensive. Between you and the corporation, you could pay $15,300 in Medicare and Social Security taxes alone. That’s a lot more than the penalty for underpayment of estimated taxes.

2. Payroll can cut into your 20 percent Section 199A deduction. Wages reduce the S corporation’s qualified business income—that’s one of the base amounts on which the 20 percent is based. If you lower the base, you likely lower your benefit.

Takeaways

Missing estimated tax payments can lead to steep, non-deductible penalties that only grow over time.

The good news is, there’s a powerful solution: by using a retirement account with the 60-day rollover provisions, you can eliminate penalties instantly by directing withholding to the IRS and repaying the account within 60 days.

This strategy works across multiple retirement plans, though IRAs have a one-year rollover limit that applies to all of your IRAs.

For those age 73 and older, they can use federal income tax withholding from their RMDs to reduce or eliminate estimated tax penalties.

Avoid using W-2 bonuses, as payroll taxes and possible reduced Section 199A deductions make them far more costly than the underpayment of estimated tax penalty itself.

Learn How to Beat 2025 Estimated Tax Penalties Instantly, Today

By Publisher, Tax Reduction Letter www.bradfordtaxinstitute.com