Safe Harbor, Cap Gain, and RMD

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Topic Author
RetiredCSProf
Posts: 568
Joined: Tue Feb 28, 2017 4:59 pm

Safe Harbor, Cap Gain, and RMD

Post by RetiredCSProf »

I have read several of the Safe Harbor threads, but I am still confused about withholding versus estimated quarterly tax payments.

Capital Gain in 2019: In 3rd quarter of 2019, I expect to complete the sale of an out-of-state property and I will realize a long-term capital gain of about $230K. I am a CA resident, which treats cap gain as ordinary income. If the property were in CA, I would be expected to pay 13.3% income tax to CA at time of sale, but not required because property is out-of-state.

Taxes Owed for 2018: The cap gain alone will bring my AGI > $150K. To follow the safe harbor rule, my understanding is that, in 2019, I need to pay 110% of tax owed in 2018, for Fed and for state. My AGI for 2018 will be about $132K. I have estimated my 2018 Fed income tax to be about $20K and CA income tax to be about $4K (single, HoH).

Tax Withholding for 2019: I have Fed and state taxes withheld from my monthly pension and Fed taxes from my SS (CA does not tax SS). That won't be enough to cover 110%.

Tax Withholding from RMD vs estimated quarterly tax payments: I can bring the withholding up to 110% either by taking out enough to cover it from RMDs or by making estimated quarterly tax payments, or some combination of the two.

If I take the withholding from RMDs, do I need to split my RMD distributions into quarterly withdrawals? Or does it not matter when I take the RMDs, as long as I have withheld enough to bring withholding up to 110%?
Prudence
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Re: Safe Harbor, Cap Gain, and RMD

Post by Prudence »

BTW, does your $132K AGI in 2018 include the RMDs?
kaneohe
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Re: Safe Harbor, Cap Gain, and RMD

Post by kaneohe »

The safe harbor rule is that you need to pay 110% of last yr tax if last yr AGI was > 150K. If 2018 AGI was 132K, then you
only need to pay 100% of 2018 tax as your 2019 safe harbor (not 110%)

Withholding can be done whenever......Estimated taxes need to be paid in equal "quarterly" payments unless you want to fill out SchAI of the 2210.
OnTrack
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Re: Safe Harbor, Cap Gain, and RMD

Post by OnTrack »

kaneohe wrote: Sat Dec 15, 2018 11:18 pm .....Estimated taxes need to be paid in equal "quarterly" payments unless you want to fill out SchAI of the 2210.
I don't think this is entirely true. For example, if you pay the entire withholding amount for the year in one payment in April, then no need to fill out an extra form. In that case, the April payment has enough of an overpayment to cover the next 3 payments.
kaneohe
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Re: Safe Harbor, Cap Gain, and RMD

Post by kaneohe »

OnTrack wrote: Sun Dec 16, 2018 1:38 am
kaneohe wrote: Sat Dec 15, 2018 11:18 pm .....Estimated taxes need to be paid in equal "quarterly" payments unless you want to fill out SchAI of the 2210.
I don't think this is entirely true. For example, if you pay the entire withholding amount for the year in one payment in April, then no need to fill out an extra form. In that case, the April payment has enough of an overpayment to cover the next 3 payments.
I think you are correct although you may be speaking a different language. Withholding paid anytime during a year is treated as paid evenly during the yr (unless you want to treat it as paid when it was paid. Estimated taxes
are treated as paid when paid. Estimated taxes are not treated the same as withholding but you may have meant estimated taxes when you used the term withholding?

It is true that you could pay all of your estimated taxes early in April instead of spread out during during the quarters of that year. Since almost no one does that, I often forget to add the term and say "pay in equal quarterly payment or faster" which is what you are proposing. In that case, I believe you don't have to fill out SchAI but possibly you might have to fill out another section of the 2210 which is much easier. If you go thru the flow chart of F2210,I believe it directs you to fill out Pt I of the 2210 if you have no withholding. Again not sure whether you meant withholding or estimated taxes.

I'm sure IRS would have no objections to you paying early.
Topic Author
RetiredCSProf
Posts: 568
Joined: Tue Feb 28, 2017 4:59 pm

Re: Safe Harbor, Cap Gain, and RMD

Post by RetiredCSProf »

Thanks for clarifying that the ">$150K" rule applies to the previous year's AGI.

Then, If I withhold enough taxes in 2019 to at least equal 100% of the taxes I owe in 2018, there is no underpayment penalty if I wait until when I file my 2019 taxes in 2020 to pay the rest of the taxes I owe for 2019. Withholding can be paid when I receive the income, and does not need to be equal in each quarter (for Fed). In other words, even though I will receive a capital gain in July 2019, I won't need to pay the capital gains taxes on it until 15 April 2020, as long as I meet safe harbor?

I have filled out that extra form on tax returns to split income and taxes into quarters -- it's a pain, so I'm trying to avoid it. I may need to fill it out again for 2018. Because of tax reform, my pension withholding was erratic in the 1st qtr this year.

Yes, the $132K AGI for 2018 includes RMDs, as well as pension, SS, taxable interest, and a Roth conversion. This was my first year of RMDs. I would have postponed the distribution to 1st qtr of 2019 if the property had sold in 2018. This amount of AGI keeps me below the next IRMAA cliff for Medicare.

If I wanted to pay "all my estimated taxes" in April 2019, does that mean paying enough to cover taxes on all my income, including the capital gain that I won't receive until July 2019? Or, does it mean paying enough to cover 100% of taxes owed in 2018?
kaneohe
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Re: Safe Harbor, Cap Gain, and RMD

Post by kaneohe »

RetiredCSProf wrote: Sun Dec 16, 2018 11:50 am .............................................................................

I have filled out that extra form on tax returns to split income and taxes into quarters -- it's a pain, so I'm trying to avoid it. I may need to fill it out again for 2018. Because of tax reform, my pension withholding was erratic in the 1st qtr this year.

.........................................................................................

If I wanted to pay "all my estimated taxes" in April 2019, does that mean paying enough to cover taxes on all my income, including the capital gain that I won't receive until July 2019? Or, does it mean paying enough to cover 100% of taxes owed in 2018?
You would be an unusual human being if you enjoyed filling out F2210 SchAI. If you can manage to satisfy safe harbor in 2018 with just withholding (100/110% of 2017 total taxes or 90% of 2018 total taxes), you won't need to file the 2210 even tho your withholding was erratic.

If you are going to pay "all your estimated taxes" in April 2019, all you have to pay is the safe harbor based on 2018 total tax. It might be more beneficial for you to file the 4 equal quarterly payments in Apr/June/Sept/Jan. so you can
earn interest on the later payments but I'm sure IRS won't protest if you pay earlier.

My interpretation of F2210 is that you have to fill out the earlier pages , but not the dreaded Sch AI , if you are not paying the equal quarterly installments of your estimated tax. Note the distinction in treatment between withholding and
paying estimated taxes.
Topic Author
RetiredCSProf
Posts: 568
Joined: Tue Feb 28, 2017 4:59 pm

Re: Safe Harbor, Cap Gain, and RMD

Post by RetiredCSProf »

I don't think I paid enough in withholding in 2018 to cover safe harbor, but I did make estimated payments. At the start of 2018, I did not know if the property would sell in 2018 or whether I would take RMDs this year.

One more question: If I have a refund in 2019 on my 2018 tax return and apply the refund to 2019 taxes, I'm assuming that counts as an "estimated payment" in the first quarter of 2019 and not withholding for 2019.
OnTrack
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Re: Safe Harbor, Cap Gain, and RMD

Post by OnTrack »

kaneohe wrote: Sun Dec 16, 2018 8:50 am
OnTrack wrote: Sun Dec 16, 2018 1:38 am
kaneohe wrote: Sat Dec 15, 2018 11:18 pm .....Estimated taxes need to be paid in equal "quarterly" payments unless you want to fill out SchAI of the 2210.
I don't think this is entirely true. For example, if you pay the entire withholding amount for the year in one payment in April, then no need to fill out an extra form. In that case, the April payment has enough of an overpayment to cover the next 3 payments.
I think you are correct although you may be speaking a different language. Withholding paid anytime during a year is treated as paid evenly during the yr (unless you want to treat it as paid when it was paid. Estimated taxes
are treated as paid when paid. Estimated taxes are not treated the same as withholding but you may have meant estimated taxes when you used the term withholding?

It is true that you could pay all of your estimated taxes early in April instead of spread out during during the quarters of that year. Since almost no one does that, I often forget to add the term and say "pay in equal quarterly payment or faster" which is what you are proposing. In that case, I believe you don't have to fill out SchAI but possibly you might have to fill out another section of the 2210 which is much easier. If you go thru the flow chart of F2210,I believe it directs you to fill out Pt I of the 2210 if you have no withholding. Again not sure whether you meant withholding or estimated taxes.

I'm sure IRS would have no objections to you paying early.
Yes, thank you for the correction. I meant estimated.
kaneohe
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Joined: Mon Sep 22, 2008 12:38 pm

Re: Safe Harbor, Cap Gain, and RMD

Post by kaneohe »

RetiredCSProf wrote: Sun Dec 16, 2018 2:14 pm ........................................................

One more question: If I have a refund in 2019 on my 2018 tax return and apply the refund to 2019 taxes, I'm assuming that counts as an "estimated payment" in the first quarter of 2019 and not withholding for 2019.
I think so......... see the 2017 1040 ......refund section at the end:

Refund

75 If line 74 is more than line 63, subtract line 63 from line 74. This is the amount you overpaid 75
76a Amount of line 75 you want refunded to you. If Form 8888 is attached, check here . ▶ 76a
................................
77 Amount of line 75 you want applied to your 2018 estimated tax ▶ 77
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