Estimated Tax Question

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M.Lee
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Joined: Tue Jun 25, 2019 8:26 am

Estimated Tax Question

Post by M.Lee » Mon Jun 29, 2020 1:06 pm

I always do my own taxes as they generally aren't that complicated. I have one stock in my after-tax account that has done well and I am considering selling it this year as a short-term gain. This is a low bracket year for me, as I delayed my RMD until 2021. I've read a bit on estimated taxes and I found it somewhat confusing. It seems the usual way people pay them is in 3 or 4 installments. I am not sure what to do because I am not positive I will sell this stock this year. If, for example, I wait until the end of the year to sell, it will be too late to do an estimated tax payment. If I pay tax on it now and then decide not to sell, what happens to that money? I guess I would get it back as an overpayment. With all the delays at IRS, that might hold up a big refund for a while. The amount of tax I'll owe is around 10k. Any comments?

kaneohe
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Re: Estimated Tax Question

Post by kaneohe » Mon Jun 29, 2020 1:29 pm

How do you normally pay your taxes during the yr? By withholding? If so you may want to determine whether you meet the 90% safe harbor for this current yr......will you withhold at least 90% of your taxes due (or will be balance be less than 1K) or 100% (110%) of last yrs taxes? If so , you are ok as is. If you need to withhold more can you do so?

The cleanest way is to pay by withholding if it is available. That removes the timing issue as w/h is always timely.
If you don't have that available consider taking an IRA withdrawal, withhold from that, and replace the IRA funds as a rollover (remember you can only do the rollover once in 365 days).

The other possibility is just to pay the estimated tax when you sell the stock. You will then have to prove to the IRS that you paid this on a timely basis by filling out SchAI of F2210. You might want to look this form over and see if it is in your nature to do. Some folks find it easy. Others hate it. If you don't fill it out, IRS will assume you received the stock sale income evenly during the yr and expect similar payments. If you fill it out, you prove the income was lumpy and you paid accordingly.

Gill
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Re: Estimated Tax Question

Post by Gill » Mon Jun 29, 2020 3:27 pm

M.Lee wrote:
Mon Jun 29, 2020 1:06 pm
If, for example, I wait until the end of the year to sell, it will be too late to do an estimated tax payment.
Not to give you a complete answer but just to clarify that the above is incorrect. The final quarterly payment is due January 15th so it will never be too late to make an estimated payment.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

retiredjg
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Re: Estimated Tax Question

Post by retiredjg » Mon Jun 29, 2020 3:37 pm

This is how I understand estimated taxes. If you are making income throughout the year, you need to pay throughout the year. So you need to be paying an estimated amount every quarter if you are not withholding taxes from your salary.

If you do something that causes a surge of income in a quarter, you pay after the quarter is over on the next tax due date. You do not need to guess if you will have income or not - if you do, pay an estimated tax.

Topic Author
M.Lee
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Joined: Tue Jun 25, 2019 8:26 am

Re: Estimated Tax Question

Post by M.Lee » Mon Jun 29, 2020 6:22 pm

retiredjg wrote:
Mon Jun 29, 2020 3:37 pm
This is how I understand estimated taxes. If you are making income throughout the year, you need to pay throughout the year. So you need to be paying an estimated amount every quarter if you are not withholding taxes from your salary.

If you do something that causes a surge of income in a quarter, you pay after the quarter is over on the next tax due date. You do not need to guess if you will have income or not - if you do, pay an estimated tax.
Sorry I'm so dense on this. So, if I sell this stock in December 2000, when I do my 2000 taxes in Jan/Feb 2001, I will be owing 10,000 or more. I can't just pay it with my 2000 tax return...right? Would I pay it in December 2000 as an estimated payment?

My ordinary income is from a pension check and SS. I don't want to increase my withholding on my pension check for just this one transaction.

retired@50
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Re: Estimated Tax Question

Post by retired@50 » Mon Jun 29, 2020 6:28 pm

M.Lee wrote:
Mon Jun 29, 2020 6:22 pm
retiredjg wrote:
Mon Jun 29, 2020 3:37 pm
This is how I understand estimated taxes. If you are making income throughout the year, you need to pay throughout the year. So you need to be paying an estimated amount every quarter if you are not withholding taxes from your salary.

If you do something that causes a surge of income in a quarter, you pay after the quarter is over on the next tax due date. You do not need to guess if you will have income or not - if you do, pay an estimated tax.
Sorry I'm so dense on this. So, if I sell this stock in December 2000, when I do my 2000 taxes in Jan/Feb 2001, I will be owing 10,000 or more. I can't just pay it with my 2000 tax return...right? Would I pay it in December 2000 as an estimated payment?

My ordinary income is from a pension check and SS. I don't want to increase my withholding on my pension check for just this one transaction.
If the stock sale were to occur in December, 2000, as described above, then the next estimated quarterly tax payment would be made by January 15th, 2001.

Typically, for people who pay quarterly estimates, the due dates are April 15, June 15, September 15, January 15. Yep, that's right, the quarterly payments stretch into the following year. Weird but true.

Regards,
This is one person's opinion. Nothing more.

kaneohe
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Re: Estimated Tax Question

Post by kaneohe » Mon Jun 29, 2020 6:46 pm

M.Lee wrote:
Mon Jun 29, 2020 6:22 pm
.......................................... So, if I sell this stock in December 2000, when I do my 2000 taxes in Jan/Feb 2001, I will be owing 10,000 or more. I can't just pay it with my 2000 tax return...right? Would I pay it in December 2000 as an estimated payment?

My ordinary income is from a pension check and SS. I don't want to increase my withholding on my pension check for just this one transaction.
If you sell in Dec 2020, your estimated tax is due Jan. 15, 2021. If you instead pay w/ your final installment in Jan/Feb you could get a penalty for the time the estimated payment is late......probably not much since the time is short.......say 3% for 1 mo. on 10K or $25. Of course you also have to file Sch AI F2210 to show you owed only a short time. If you don't , the payment expected will be for the 4 quarters and the penalty will be larger.

You have to balance the pain of doing that form against the pain of changing withholding.

lstone19
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Re: Estimated Tax Question

Post by lstone19 » Mon Jun 29, 2020 11:10 pm

Estimated payments are just payments to your tax account. They are not "for" a particular item of income. If you paid too much during the year, either by withholding or estimated payments, the overage is refunded after you file your tax return.

But, as kaneohe mentioned but it didn't get picked up later in the thread, you only need to pay during the year the lower of two "safe-harbor" amounts: 90% of the current year's tax or 100% of the prior year's tax (110% if the prior year's AGI was over $150,000). While you don't know the 90% of the current year's tax, you do know (or will as soon as you complete your 2019 tax return) what the 100% (110%) of the prior year's tax is. If you will exceed that with the withholding on your pension and/or SS, then stop as you do need to make additional payments and can pay the balance without penalty by 4/15/21.

retiredjg
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Re: Estimated Tax Question

Post by retiredjg » Tue Jun 30, 2020 7:15 am

M.Lee wrote:
Mon Jun 29, 2020 6:22 pm
retiredjg wrote:
Mon Jun 29, 2020 3:37 pm
This is how I understand estimated taxes. If you are making income throughout the year, you need to pay throughout the year. So you need to be paying an estimated amount every quarter if you are not withholding taxes from your salary.

If you do something that causes a surge of income in a quarter, you pay after the quarter is over on the next tax due date. You do not need to guess if you will have income or not - if you do, pay an estimated tax.
Sorry I'm so dense on this. So, if I sell this stock in December 2000, when I do my 2000 taxes in Jan/Feb 2001, I will be owing 10,000 or more. I can't just pay it with my 2000 tax return...right? Would I pay it in December 2000 as an estimated payment?

My ordinary income is from a pension check and SS. I don't want to increase my withholding on my pension check for just this one transaction.
Assuming you mean 2020. :happy

Your estimated tax would be "due" on January 15, 2021.

However, as noted by a couple of other posters, if you meet a "safe harbor" with just your withholding from the pension check, you will not need to pay the estimated tax by January 15. You can simply pay your extra $10k with your tax return.

For example if your entire tax bill (not what was owed on April 15) for 2019 was $9,000, you can get into a "safe harbor" by simply withholding $9,000 in 2020. If you are a higher earner, you need to withhold 110% of last year's tax ( $9,900) by the end of the year.

If we assume you are paying the taxes out of savings (instead of withholding from the IRA), you might have to make an estimated tax payment on January 15 anyway - just enough to get you into the safe harbor - and pay the rest of the $10k with your tax return.
Last edited by retiredjg on Tue Jun 30, 2020 7:33 am, edited 1 time in total.

retiredjg
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Re: Estimated Tax Question

Post by retiredjg » Tue Jun 30, 2020 7:20 am

This article contains a lot more than what you need but addresses your question.

https://wallethacks.com/estimated-taxes ... bor-rules/

lstone19
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Re: Estimated Tax Question

Post by lstone19 » Tue Jun 30, 2020 7:26 am

retiredjg wrote:
Tue Jun 30, 2020 7:15 am
Assuming you mean 2020. :happy

Your estimated tax would be "due" on January 15, 2020.
Correction: January 15, 2021 (4th quarter is due on the 1/15 of the following year)
For example if your entire tax bill (not what was owed on April 15) for 2019 was $9,000, you can get into a "safe harbor" by simply withholding $9,000 in 2020. If you are a higher earner, you need to withhold 110% of last year's tax ( $9,090) by the end of the year.
Correction: 110% of $9,000 is $9,900

retiredjg
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Re: Estimated Tax Question

Post by retiredjg » Tue Jun 30, 2020 7:32 am

lstone19 wrote:
Tue Jun 30, 2020 7:26 am
retiredjg wrote:
Tue Jun 30, 2020 7:15 am
Assuming you mean 2020. :happy

Your estimated tax would be "due" on January 15, 2020.
Correction: January 15, 2021 (4th quarter is due on the 1/15 of the following year)
For example if your entire tax bill (not what was owed on April 15) for 2019 was $9,000, you can get into a "safe harbor" by simply withholding $9,000 in 2020. If you are a higher earner, you need to withhold 110% of last year's tax ( $9,090) by the end of the year.
Correction: 110% of $9,000 is $9,900
:oops: I should not type before coffee, should I?

lstone19
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Re: Estimated Tax Question

Post by lstone19 » Tue Jun 30, 2020 7:43 am

retiredjg wrote:
Tue Jun 30, 2020 7:32 am
:oops: I should not type before coffee, should I?
No, you shouldn't. :happy While what you meant was obvious to those of us who fully understand it, we don't need to be sowing more confusion among those who are already confused by all these rules.

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