Tax Payments for selling stocks

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Steelhead754
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Tax Payments for selling stocks

Post by Steelhead754 » Mon Sep 09, 2019 1:19 pm

I have stocks that I would like to liquidate fully so that I can go fully into Index Funds. I have sold off some appreciated stocks that have LTCG, in addition to, stocks with LTCG losses. I have also started to sell off stocks with short term losses, but have remaining stocks that I can hold on to to get LTCG. I also sold some EJ Funds and moved that money into Vanguard.

My question is, given that there will be greater values for LTCG vs LTCG losses, do I have to pay anticipated taxes on those gains now, or wait until end of year? Will my STCG losses help off set the LTCG? I will also have about $2000 in 1099 income that was not taxed at the Fed level. (As a side note, I was able to max out an HSA ($7000) with anticipated tax deduction in APRIL and maxED out my 403B to reduce anticipated taxes from 24% to 22% bracket.)

TIA!

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RickBoglehead
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Re: Tax Payments for selling stocks

Post by RickBoglehead » Mon Sep 09, 2019 1:28 pm

Whether you pay estimated taxes or not is dependent on how the year works out, not any one particular event. So, if as of today you have say $50,000 in long term gains BUT you believe you will have $50,000 in corresponding losses before year end, resulting in no tax owed, you would not need to do anything.

Likewise, if you have $50,000 in gains, and thought you would end up with $20,000 in losses, resulting in a net long term gain of $30,000, then you would need to evaluate whether you needed to pay estimated taxes on that. If you did, those taxes are paid in the period the tax liabiity is incurred.

Jan 1 - March 31st is due April 15th
April - May 31st is due June 15th
June 1 - August 31 is due September 15th
September 1 - December 31st is due January 15, 2020

So, if you have LTCG from Q1, and hope to totally offset them before the end of the year, then you don't need to do anything. However, if you don't offset them, when you calculate your taxes you MAY find yourself with a penalty situation.

Your losses are used to offset each other - long term against long term, short term against short term. If you have excess short term losses, they are then used to offset long term gains. If you still have more short term losses left, you can offset up to $3,000 in ordinary income, and the rest would carry to future years.

You can read all about estimated taxes here - at https://www.irs.gov/publications/p505, including pointing out that if your 2019 taxes that you do pay equal your 2018's taxes, then even if your 2019 tax bill is way higher you'll have no penalty, and not owe anything until April 15, 2020. Some people in this situation pay estimated taxes, some just plan on a big tax bill in April.

Penalties Related to Estimated Taxes
If a taxpayer underpaid their taxes, they may have to pay a penalty. This applies whether they paid through withholding or through estimated payments. A penalty may also apply for late estimated payments, even if someone is due a refund when they file their tax return.

In general, taxpayers don’t have to pay a penalty if they meet any of these conditions:

They owe less than $1,000 in tax with their tax return.
Throughout the year, they paid the smaller of these two amounts:
at least 90 percent of the tax for the current year
100 percent of the tax shown on their return for the prior year – this can increase to 110 percent based on adjusted gross income
To see if they owe a penalty, taxpayers should use Form 2210.
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ivk5
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Re: Tax Payments for selling stocks

Post by ivk5 » Mon Sep 09, 2019 2:18 pm

Don’t forget to consider state as well as federal. Some states have different payment schedule (eg CA) and some may have different safe harbor rules.

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FiveK
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Re: Tax Payments for selling stocks

Post by FiveK » Mon Sep 09, 2019 5:39 pm

Might be worth your while to estimate your 2019 tax situation now. See US and state income tax calculator - Bogleheads.org for some suggested tools.

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grabiner
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Re: Tax Payments for selling stocks

Post by grabiner » Mon Sep 09, 2019 8:08 pm

If you do find that you need to pay additional tax (because you won't meet the safe harbor rules), you can either increase withholding from your salary (file a new W-4 and ask your employer to withhold an extra $500 per paycheck) or pay estimated tax.

Increasing withholding is likely to be easier to manage. If you pay estimated tax, you will not have paid your tax in equal amounts in the four quarters. Therefore, you will need to file Schedule AI with Form 2210 to determine how much of your tax was owed each quarter. Since you earned extra income in the fourth quarter (which begins September 1 for tax purposes), you can probably avoid a penalty by showing that you had adequate withholding in the first three quarters, and that you made your fourth-quarter payment by the January 15 due date.
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lstone19
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Re: Tax Payments for selling stocks

Post by lstone19 » Tue Sep 10, 2019 12:39 pm

grabiner wrote:
Mon Sep 09, 2019 8:08 pm
Increasing withholding is likely to be easier to manage. If you pay estimated tax, you will not have paid your tax in equal amounts in the four quarters. Therefore, you will need to file Schedule AI with Form 2210 to determine how much of your tax was owed each quarter. Since you earned extra income in the fourth quarter (which begins September 1 for tax purposes), you can probably avoid a penalty by showing that you had adequate withholding in the first three quarters, and that you made your fourth-quarter payment by the January 15 due date.
That is incorrect. Not paying equal installments does not force filing schedule AI which deals with Annualized Income. If you’ve still met the safe harbor requirements for each quarter without annualizing your income, there is no need for Schedule AI as form 2210 handles unequal payments on its own (Schedule AI is for unequal INCOME and which the OP will have unequal income, there is no need to go into it if there is no penalty without doing so).

And you only need to file form 2210 if you need to check one of the Part II reasons to avoid or reduce a penalty. If you didn’t need to check one of the Part II boxes, the IRS can figure it out for themselves (they know your total withholding and the dates and amounts of your estimated payments).

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FiveK
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Re: Tax Payments for selling stocks

Post by FiveK » Tue Sep 10, 2019 12:56 pm

lstone19 wrote:
Tue Sep 10, 2019 12:39 pm
grabiner wrote:
Mon Sep 09, 2019 8:08 pm
If you do find that you need to pay additional tax (because you won't meet the safe harbor rules)...
If you’ve still met the safe harbor requirements for each quarter....
Different assumptions lead to different conclusions?

lstone19
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Re: Tax Payments for selling stocks

Post by lstone19 » Tue Sep 10, 2019 1:16 pm

FiveK wrote:
Tue Sep 10, 2019 12:56 pm
lstone19 wrote:
Tue Sep 10, 2019 12:39 pm
grabiner wrote:
Mon Sep 09, 2019 8:08 pm
If you do find that you need to pay additional tax (because you won't meet the safe harbor rules)...
If you’ve still met the safe harbor requirements for each quarter....
Different assumptions lead to different conclusions?
Valid point. But you said "If you pay estimated tax, you will not have paid your tax in equal amounts in the four quarters. Therefore, you will need to file Schedule AI with Form 2210 to determine how much of your tax was owed each quarter." The second does not follow from the first sentence. The OP, if unable to increase withholding enough to meet the safe harbor, will need to file Schedule AI but not due to unequal estimated payments but rather due to unequal income.

There seems to be prevailing theme here in Bogleheads that equal payments are required and not making equal payments greatly complicates things but that is not true. If you look at Form 2210, you'll see that unequal payments are handled just fine with any excess or shortfall from one quarter carrying through to the next. And if you use tax software, 2210 is handled automatically as it is normally just numbers for elsewhere in your return or tax file and math.

What seems to cause this is one or more people who have pointed out that a literal reading of the safe harbor requirements requires equal payments. But the penalty calculation does not. Meet the rest of the safe harbor requirements with unequal payments and the penalty is still zero. And in the end, the goal is to not owe a penalty. So it's a distinction without a difference unless you get a letter saying "I'm sorry but you not meet the safe harbor requirements so you'll have to pay a penalty. We've calculated that penalty and it is $0. Please pay $0 immediately."

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FiveK
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Re: Tax Payments for selling stocks

Post by FiveK » Tue Sep 10, 2019 1:44 pm

lstone19 wrote:
Tue Sep 10, 2019 1:16 pm
FiveK wrote:
Tue Sep 10, 2019 12:56 pm
lstone19 wrote:
Tue Sep 10, 2019 12:39 pm
grabiner wrote:
Mon Sep 09, 2019 8:08 pm
If you do find that you need to pay additional tax (because you won't meet the safe harbor rules)...
If you’ve still met the safe harbor requirements for each quarter....
Different assumptions lead to different conclusions?
Valid point. But you said "If you pay estimated tax, you will not have paid your tax in equal amounts in the four quarters. Therefore, you will need to file Schedule AI with Form 2210 to determine how much of your tax was owed each quarter." The second does not follow from the first sentence. The OP, if unable to increase withholding enough to meet the safe harbor, will need to file Schedule AI but not due to unequal estimated payments but rather due to unequal income.

There seems to be prevailing theme here in Bogleheads that equal payments are required and not making equal payments greatly complicates things but that is not true. If you look at Form 2210, you'll see that unequal payments are handled just fine with any excess or shortfall from one quarter carrying through to the next. And if you use tax software, 2210 is handled automatically as it is normally just numbers for elsewhere in your return or tax file and math.

What seems to cause this is one or more people who have pointed out that a literal reading of the safe harbor requirements requires equal payments. But the penalty calculation does not. Meet the rest of the safe harbor requirements with unequal payments and the penalty is still zero. And in the end, the goal is to not owe a penalty. So it's a distinction without a difference unless you get a letter saying "I'm sorry but you not meet the safe harbor requirements so you'll have to pay a penalty. We've calculated that penalty and it is $0. Please pay $0 immediately."
Perhaps grabiner will answer at length, as the original quote was his.

A tax payment shortfall in any quarter will generate a penalty. Perhaps it's in the eye of the beholder, but that doesn't seem to support "unequal payments are handled just fine...."

I suspect all would agree with "Meet the rest of the safe harbor requirements [for each quarter] with unequal payments and the penalty is still zero."

lstone19
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Re: Tax Payments for selling stocks

Post by lstone19 » Tue Sep 10, 2019 1:50 pm

FiveK wrote:
Tue Sep 10, 2019 1:44 pm
A tax payment shortfall in any quarter will generate a penalty. Perhaps it's in the eye of the beholder, but that doesn't seem to support "unequal payments are handled just fine...."
Being handled "just fine" does not mean no penalty. It merely means that Form 2210 is capable of handling unequal payments without additional forms.

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grabiner
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Re: Tax Payments for selling stocks

Post by grabiner » Tue Sep 10, 2019 8:15 pm

lstone19 wrote:
Tue Sep 10, 2019 12:39 pm
grabiner wrote:
Mon Sep 09, 2019 8:08 pm
Increasing withholding is likely to be easier to manage. If you pay estimated tax, you will not have paid your tax in equal amounts in the four quarters. Therefore, you will need to file Schedule AI with Form 2210 to determine how much of your tax was owed each quarter. Since you earned extra income in the fourth quarter (which begins September 1 for tax purposes), you can probably avoid a penalty by showing that you had adequate withholding in the first three quarters, and that you made your fourth-quarter payment by the January 15 due date.
That is incorrect. Not paying equal installments does not force filing schedule AI which deals with Annualized Income. If you’ve still met the safe harbor requirements for each quarter without annualizing your income, there is no need for Schedule AI as form 2210 handles unequal payments on its own (Schedule AI is for unequal INCOME and which the OP will have unequal income, there is no need to go into it if there is no penalty without doing so).
However, if you need to pay estimated tax in the fourth quarter in order to avoid a penalty, this is presumably because you did not have enough withheld during the year (or paid as four equal payments if you pay the rest of your tax by estimated tax as well). Therefore, you will need to file Schedule AI to avoid or reduce the penalty.

My point was that the OP is likely to need to do this, and he does not need to file Schedule AI if he pays the additional tax by withholding rather than estimated tax. If your total tax paid is all paid by withholding, and it meets the safe harbor limit, you owe no penalty and do not need to file Form 2210, because you can treat withholding as being paid equally in each quarter. If you pay estimated tax in unequal amounts, and the first three quarters do not each cover 25% of the safe harbor but the total covers 100%, then you will owe a penalty unless you file Form 2210 with Schedule AI.
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FactualFran
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Re: Tax Payments for selling stocks

Post by FactualFran » Wed Sep 11, 2019 2:26 pm

There seems to be an issue about whether it is necessary to complete Schedule AI of Form 2210. It is not necessary but doing so can reduce or eliminate underpayment penalties.

If one does not include a Form 2210 with a tax return, then the IRS will calculate underpayment penalties using the assumption that income was earned at the same rate throughout the year. The IRS calculation will include estimated tax payment made each quarter, whether or not the same estimated payment was made for each quarter.

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