How to pay taxes in this situation

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Topic Author
coopdogyo
Posts: 2
Joined: Sun May 13, 2018 11:59 am

How to pay taxes in this situation

Post by coopdogyo »

Alright I am struggling to figure out the best way to pay taxes in this situation. I am the beneficiary of a trust that primarily holds ownership of an LLC that owns a commercial development. When I turned 25 I received a 5% stake in the LLC which means that I now get a K1 and have to work out the taxes. Long story short I am at the end of a very long line of entities which means that the estimated K1 often doesn't get to me until about April 8th or in a year where there is an extension like this year I haven't even gotten it yet. I then have to file an extension and get the final K1 sometime in September.

My issue is that income is very lumpy, if the development sells a building there is lots of income and therefor taxes. Otherwise the income is fairly minimal as most of the land is still undeveloped. However, when a building is sold, the LLC has been using the money to pay off debt related to the purchase of the development as well as stock-piling cash for an eventual capital call. I don't have any control over what happens in the development so it is very hard for me to estimate my tax liability. I know the answer is to ensure that I withhold 110% of the previous years income however if in the previous year a building was sold the amount I would have to withhold or pay in estimated tax is massive and will result in un-due hardship as my W2 income is only around $60k a year. My other issue is that I am 27 so I have been in this tax situation for two years now, and in year one my taxes were weird because I got my 5% stake and the second year the development sold a building. Assuming my third year is normal and my liability is a lot lower but I have no idea how low, what is the best way to adjust my withholding? Should I try to pay 110% of whatever the previous years income was? I don't know how much it will be yet but I received a $10k distribution to cover the tax bill. Trying to withhold another $10k on my $60k income isn't feasible to ensure that I pay 110% of my previous years income. Is there a better way forward, should I request a distribution quarterly to cover estimated taxes?
scifilover
Posts: 378
Joined: Sun Apr 14, 2013 12:56 pm

Re: How to pay taxes in this situation

Post by scifilover »

Since you cannot afford to pay enough to reach the 110% safe harbor, the easiest way to deal with this situation is not to deal with it. In a year when the development sells a building, you will have to pay a penalty. The penalty will act to reduce your piece of the profit from the sale. In a year without a sale, no impact on your taxes as the withholding on your earned income is enough to cover your tax liability. If a building sale is rare, say once in every 3 years, you could even ask the IRS to waive the penalty. No point in losing sleep over something you can't control, just don't spend the extra income until you have dealt with the tax liability.
prd1982
Posts: 495
Joined: Sun Jan 08, 2017 4:43 pm

Re: How to pay taxes in this situation

Post by prd1982 »

If you only make 60k in wages, the k-1 distribution must be large to require 110% vs. 100%.

My suggestion —

When your income from last year is modest, try to withhold 100%/110% during the current year. This will eliminate the penalty for the high year. When last year was large, try to withhold what is needed for a normal year. This may require you to hold back some of the income from the high year to pay withholding. This should eliminate a penalty unless you have 2 high income years in a row.
BillWalters
Posts: 195
Joined: Sun Aug 11, 2019 5:21 pm

Re: How to pay taxes in this situation

Post by BillWalters »

I would just pay the penalty when necessary in this situation. Do you get distributions for taxes?
Topic Author
coopdogyo
Posts: 2
Joined: Sun May 13, 2018 11:59 am

Re: How to pay taxes in this situation

Post by coopdogyo »

I do get distributions for taxes, would it be better to factor in the penalty as well? Over 75k AGI and I have to withhold 110% since I am single. Is that correct?
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