Fed Income Tax - Safe Harbor & Large Capital Gains Tax

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IvanW
Posts: 34
Joined: Fri Apr 15, 2016 12:59 pm

Fed Income Tax - Safe Harbor & Large Capital Gains Tax

Post by IvanW »

Hi all,

There's a 50/50 chance I'll be selling a large chunk of equities in the next month or two ... It could trigger a 2022 capital gains tax hit in the neighborhood of $100K.

By the end of the year, by design, I'll have 2022 taxes withheld by my employer that exceed 110% of my last year's tax liability.

I *think* this means that -- with respect to the stock sale and taxes owed -- I won't have to settle up with Uncle Sam until I file my taxes next year (I'll owe a bunch), but I WILL NOT be assessed an underpayment penalty because I've met "safe harbor".

Is this correct? Any gotchas I'm not aware of?

Thanks!
newacct
Posts: 168
Joined: Thu Feb 23, 2012 2:03 am

Re: Fed Income Tax - Safe Harbor & Large Capital Gains Tax

Post by newacct »

yes, at least for federal taxes
lstone19
Posts: 1615
Joined: Fri Nov 03, 2017 3:33 pm

Re: Fed Income Tax - Safe Harbor & Large Capital Gains Tax

Post by lstone19 »

Yes, as said above, for 2022. But you will need to be more aware for 2023. The safe harbor for 2023 will be the lower of 110% of your 2022 taxes or 90% of what your 2023 taxes end up being. So if you expect 2023 income to fall back to about what it was in 2021, using 110% of 2022 will result in a large overwithholding which, while it will get refunded, is not desirable. The good news is if 2023 income is about the same as 2021, using 110% of 2021 as a proxy for 90% of 2023's taxes will probably insure you have enough withheld to avoid an underpayment penalty. And keep in mind that the penalty is really just interest of the amount you should have paid so will likely be minimal should you end up short.
Topic Author
IvanW
Posts: 34
Joined: Fri Apr 15, 2016 12:59 pm

Re: Fed Income Tax - Safe Harbor & Large Capital Gains Tax

Post by IvanW »

Thank you for the replies. I did not know about the upcoming changes and I appreciate the education!
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