How to Handle Taxes on One Time Windfall (sale)

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hirlaw
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How to Handle Taxes on One Time Windfall (sale)

Post by hirlaw » Thu Apr 20, 2017 1:54 pm

I own a share of a limited partnership that is selling its major asset. In about a week I will be receiving funds and will incur about a $220K long term gain.

Any suggestions on how to deal with the taxes to avoid penalties? I have read about the "safe harbor" provision for estimating taxes (making sure I paid 110% of last years taxes). However, I don't normally make estimated payments and it is too late to pay/file for 1st quarter 2017.

Could I estimate what I think the tax would be and pay it for quarters 2, 3 & 4, without paying quarter 1?

Thanks in advance for your help!
Last edited by hirlaw on Thu Apr 20, 2017 2:03 pm, edited 2 times in total.

swingandmiss
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Re: How to Handle Taxes on One Time Windfall (sale)

Post by swingandmiss » Thu Apr 20, 2017 1:58 pm

I believe you'll just have to make estimates going forward this year. I don't think the 110% is enough based on the amount. It wasn't for us but we had a higher liability last year.

pshonore
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Re: How to Handle Taxes on One Time Windfall (sale)

Post by pshonore » Thu Apr 20, 2017 2:35 pm

hirlaw wrote:I own a share of a limited partnership that is selling its major asset. In about a week I will be receiving funds and will incur about a $220K long term gain.

Any suggestions on how to deal with the taxes to avoid penalties? I have read about the "safe harbor" provision for estimating taxes (making sure I paid 110% of last years taxes). However, I don't normally make estimated payments and it is too late to pay/file for 1st quarter 2017.

Could I estimate what I think the tax would be and pay it for quarters 2, 3 & 4, without paying quarter 1?

Thanks in advance for your help!
Are you certain its a long term gain? It may very well be, but you won't know for sure until you get a K1 in about a year. Sale of partnership assets can be tricky.

delamer
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Re: How to Handle Taxes on One Time Windfall (sale)

Post by delamer » Thu Apr 20, 2017 2:36 pm

Am I being naive to think that the IRS would not penalize you for not paying taxes on capital gains until you actually incur them?

In my state, you can show your income by quarter when you file your taxes and you will not have to pay a penalty for undepayment if you paid extra taxes for the quarter when you actually incurred them. I had capital gains last year, but not until the 4th quarter so I did not pay any estimated taxes until then.

Gill
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Re: How to Handle Taxes on One Time Windfall (sale)

Post by Gill » Thu Apr 20, 2017 2:51 pm

Some misleading answers above. Yes, pay in 110% of your 2016 tax in four installments. You can still mail your first quarter payment due two days ago and there shouldn't be a problem. At the worst you might be charged two days penalty on the one quarter payment.
Gill

hirlaw
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Re: How to Handle Taxes on One Time Windfall (sale)

Post by hirlaw » Thu Apr 20, 2017 4:30 pm

Thanks for your responses!

nordsteve
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Re: How to Handle Taxes on One Time Windfall (sale)

Post by nordsteve » Thu Apr 20, 2017 4:35 pm

Another option: if you have enough w-2 income, you can go the additional withholding path and avoid estimated tax payments entirely.

hirlaw
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Re: How to Handle Taxes on One Time Windfall (sale)

Post by hirlaw » Thu Apr 20, 2017 4:49 pm

nordsteve: I don't think that would work for us, especially considering that we would be starting so late in the year.

Spirit Rider
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Re: How to Handle Taxes on One Time Windfall (sale)

Post by Spirit Rider » Thu Apr 20, 2017 5:00 pm

You have plenty of time to increase W-2 withholding. You have over eight months to ensure that your tax withholding >= 110% of you 2016 tax liability.

If you normally get a refund, you might not even have to increase your withholding or by that much. You can always check back in on say 9/1 and bump it more if need be.

When I had these situations I always dealt with it by increasing withholding. Even now without W-2 withholding, I do it with high withholding of taxable retirement accounts.

hirlaw
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Re: How to Handle Taxes on One Time Windfall (sale)

Post by hirlaw » Thu Apr 20, 2017 5:11 pm

Spirit Rider: We normally pay, rather than receive a refund. Last year we paid about $8k. If the taxes on the partnership distribution are around $50K, that would be about $60k in withholding to add to the current withholding. Sounds like a lot.

rrppve
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Re: How to Handle Taxes on One Time Windfall (sale)

Post by rrppve » Thu Apr 20, 2017 5:16 pm

You only need the withholding and estimated tax payments to equal 110% of your 2016 taxes.
It doesn't matter when the withholding tax payments are made, they are assumed to be made throughout the whole year even if you just devote your last paycheck in December to withholding.
Just reach the 110% threshold and you'll be fine. Coming up with the cash next April 15 will be the painful part.

MikeG62
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Re: How to Handle Taxes on One Time Windfall (sale)

Post by MikeG62 » Thu Apr 20, 2017 5:18 pm

hirlaw wrote:Spirit Rider: We normally pay, rather than receive a refund. Last year we paid about $8k. If the taxes on the partnership distribution are around $50K, that would be about $60k in withholding to add to the current withholding. Sounds like a lot.
The safe harbor is 110% of your 2016 tax. That should be a lot less than your 2017 tax liability. If you do that through increased withholding going forward on your W2 income you can then make the large tax payment associated with the one time gain in April of 2018.

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grabiner
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Re: How to Handle Taxes on One Time Windfall (sale)

Post by grabiner » Thu Apr 20, 2017 7:12 pm

delamer wrote:Am I being naive to think that the IRS would not penalize you for not paying taxes on capital gains until you actually incur them?

In my state, you can show your income by quarter when you file your taxes and you will not have to pay a penalty for undepayment if you paid extra taxes for the quarter when you actually incurred them. I had capital gains last year, but not until the 4th quarter so I did not pay any estimated taxes until then.
The IRS works this way as well. You can annualize your income on Form 2210 to eliminate the penalty. If you report that you earned 70% of your income in the second quarter and 10% in the other three quarters, then you can pay 10% of the minimum payment in the first quarter (via withholding or estimated tax, and you can treat withholding as being done equally during the year), but must then pay 70% in the second quarter.

Alternatively, you can pay 25% in all four quarters, regardless of when you earned your income. If the OP does this, making the first-quarter payment on May 1 rather than the proper April 18, the penalty for making this payment late will be 13 days' interest, which should be trivial.
David Grabiner

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Re: How to Handle Taxes on One Time Windfall (sale)

Post by Spirit Rider » Thu Apr 20, 2017 7:50 pm

hirlaw wrote:Spirit Rider: We normally pay, rather than receive a refund. Last year we paid about $8k. If the taxes on the partnership distribution are around $50K, that would be about $60k in withholding to add to the current withholding. Sounds like a lot.
You don't have to add the taxes on the sale of the partnership to your withholding. You only have to ensure your total tax payments for 2017 are >= 110% of your 2016 tax liability.

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