Help estimating my tax liability in 2023 to inform if I need to make estimated payments

[Aguilar]

I'm evaluating my 2023 tax liability to figure out if I should make estimated tax payments, increase my tax withholding, or both. When I do this, should I calculate my tax liability per quarter? I'm supposed to receive about $75k in proceeds from a land sale by April (land was not put in a trust) and I suspect about $35k in long term cap gains. I also received my annual work bonus recently, but my single, zero status should cover it. The rest of my income will be pretty evenly spread across the year.

This is what I've done so far. Need to plug in the rest of the actual #s. Where I've included #s already, it's for the full year.

MY FEDERAL PROJECTIONS 

$  taxable work income: $205k gross salary + $ bonus payout in March 2023 - $22,500 401k contribution - $ HSA - $ insurance premiums - $ disability benefits buy-up
$ land sale cap gains
$16,800 Social Security Disability Income ($3,357.00 per month for Jan-May). Need to calculate how much of SSDI will be taxed by fed
$19,500 qualified dividends
$22k ordinary dividends
$1500 interest income
-$3k capital loss carryover

$500 foreign tax credit
$ net investment income tax 

Projected income subject to marginal income tax rate: $ - $13,850 standard deduction = $ income
Qualified dividends subject to 15% tax rate: $ x .15 = $ in taxes owed
Fed taxes owed: $ marginal income tax + $ qualified dividends + $ net investment income tax - $ foreign tax credit = $
Taxes to be withheld: $ ($ paycheck withholding, filing single zero allowances)

Expected fed tax liability: $

NY STATE PROJECTIONS:

My projected income is $ (includes qualified and non qualified dividends) - $ NY standard deduction = $ - $ SSDI income which isn’t taxable by NY = $
NY taxes owed: $ (income tax using NY tax brackets - $ foreign tax credit)
Taxes withheld: $ ($ paycheck withholding for NY and NYC using single zero),
Expected state tax liability: $

Thanks!

[Stinky]

How are you preparing your taxes for 2022?

If you are using commercial software like Turbotax etc., you could just plug in your estimates of 2023 income into the 2022 software to get a general idea of what your taxes will be for 2023. It's likely to be a little conservative since tax brackets will be higher for 2023 taxes than for 2022.

That's the first step. Once you see how your total taxes compare to withholding that you're already planning to do, you can go from there to decide whether to go the "additional withholding" or "estimated tax" route.

[Hyperchicken]

A bit basic, will not do things like SSDI taxability, NIIT, etc., but still informative.

https://engaging-data.com/tax-brackets/

Bundle all income taxed at ordinary rates (wages, interest, etc.) and all income taxed at long term capital gains rate (qualified dividends, LT CG, etc.)

[FiveK]

The Tax estimation tools wiki offers several alternatives, including Stinky's suggestion to use what you might have already.

If you don't have commercial software available, two of the estimation tools include state tax estimates. I prefer the spreadsheet one, but that's a matter of taste.

If you can make withholding work, then you don't need to worry about quarterly amounts. See the Safe harbors discussion regarding federal tax. NY probably has something similar.

[Aguilar]

How are you preparing your taxes for 2022?

If you are using commercial software like Turbotax etc., you could just plug in your estimates of 2023 income into the 2022 software to get a general idea of what your taxes will be for 2023. It's likely to be a little conservative since tax brackets will be higher for 2023 taxes than for 2022.

That's the first step. Once you see how your total taxes compare to withholding that you're already planning to do, you can go from there to decide whether to go the "additional withholding" or "estimated tax" route.

I was going to do it manually so I could apply 2023 tax rates and the 2023 standard deduction. Not worth it? I use freetaxusa software and can try that as well.

Let’s say the software says I owe $4k fed and $2k NY state. Am I ok to divide the liability for fed by 4 and pay 4 equal estimated tax payments of $1k? And the same approach for NY - $500 per estimated tax payment?

Reason I ask is I’m receiving the land sale proceeds in April. Am I supposed to pay more in estimated tax by mid April then? Example: $2000 payment 1, $2000/3 for payments 2-4.

[peteyboy]

If you estimate the projected annual taxes from the engaging-data calculator (link posted earlier) or from this one at moneychimp (http://www.moneychimp.com/features/tax_calculator.htm) you can adjust your withholding (from W-2 job) during the year such that the appropriate amount of taxes are withheld.

Many find this approach way easier than sending quarterly estimated tax payments, if they have a W-2 job to do so. And from a safe harbor perspective, if withholdings cover at least 90% of your tax bill you are fine - doesn't matter when the income was earned during the year.

if you want a calculator that includes NY state - look here: https://smartasset.com/taxes/new-york-tax-calculator

[FiveK]

I was going to do it manually so I could apply 2023 tax rates and the 2023 standard deduction. Not worth it? I use freetaxusa software and can try that as well.

Most of the "Tax estimation tools" covered in that wiki have a 2023 option.

[CAsage]

How was the "land sale" owned? You mentioned (not in a trust) so that's why I ask. If you owned it, what was your cost basis or is the $75k all profit? If by chance it was inherited, it's likely not to be taxable or the cost basis would be the day the prior owner passed. Just wondering.

[Aguilar]

How was the "land sale" owned? You mentioned (not in a trust) so that's why I ask. If you owned it, what was your cost basis or is the $75k all profit? If by chance it was inherited, it's likely not to be taxable or the cost basis would be the day the prior owner passed. Just wondering.

It was my grandparents'. Passed to my father and uncle. When my father passed, his half went to my two brothers and me. I get 1/6 of the sale which is $75k. Last appraisal done was a while ago and my cap gains are about $30k.

[Aguilar]

When I plug in my federal income tax withheld in the software to estimate my 2023 tax liability, do I just aggregate the Federal Income Tax amounts on my paystubs? Or do I also need to account for Social Security Tax and Medicare Tax withheld from my checks? Pretty sure I just include Federal Income Tax and disregard the other taxes, but just want to double check here.

[peteyboy]

When I plug in my federal income tax withheld in the software to estimate my 2023 tax liability, do I just aggregate the Federal Income Tax amounts on my paystubs? Or do I also need to account for Social Security Tax and Medicare Tax withheld from my checks? Pretty sure I just include Federal Income Tax and disregard the other taxes, but just want to double check here.

Just Fed Income Tax.

You may also want to figure if your state requires estimated payments as well, most do - and typically it's based on a threshold of amount owed.

https://support.taxslayer.com/hc/en-us/ ... -Payments-

[Aguilar]

When I plug in my federal income tax withheld in the software to estimate my 2023 tax liability, do I just aggregate the Federal Income Tax amounts on my paystubs? Or do I also need to account for Social Security Tax and Medicare Tax withheld from my checks? Pretty sure I just include Federal Income Tax and disregard the other taxes, but just want to double check here.

Just Fed Income Tax.

You may also want to figure if your state requires estimated payments as well, most do - and typically it's based on a threshold of amount owed.

https://support.taxslayer.com/hc/en-us/ ... -Payments-

I'm in NYC. I've never paid state estimated payments before and always got a state refund. If after I estimate 2023 I calculate I owe to state, I'll pay estimated tax. I think when calculating my NY State tax liability, I'm supposed to aggregate both my NYS and NYC taxes withheld from my paychecks. Do you know if that's correct?

[FiveK]

I'm in NYC. I've never paid state estimated payments before and always got a state refund. If after I estimate 2023 I calculate I owe to state, I'll pay estimated tax. I think when calculating my NY State tax liability, I'm supposed to aggregate both my NYS and NYC taxes withheld from my paychecks. Do you know if that's correct?

Don't know, but https://www.tax.ny.gov/pdf/current_form ... 105_9i.pdf might be helpful to you.

[Aguilar]

I'm in NYC. I've never paid state estimated payments before and always got a state refund. If after I estimate 2023 I calculate I owe to state, I'll pay estimated tax. I think when calculating my NY State tax liability, I'm supposed to aggregate both my NYS and NYC taxes withheld from my paychecks. Do you know if that's correct?

Don't know, but https://www.tax.ny.gov/pdf/current_form ... 105_9i.pdf might be helpful to you.

thanks. This doc refers to NY State, NYC, Yonkers, etc. taxes together which suggests to me that I should account for my state and city taxes withheld when assessing my estimated tax payments, if any. When I pay my taxes each year I don't cut a separate check for NYC taxes, so that also supports grouping my state and city taxes together for the purpose of estimated tax calcs.

I have two other questions:

I have about $7k in capital losses to carryover to 2023. I expect $5k in capital gains taxes owed for this land sale. I will also have about $2k in dividend cap gains taxes. I assume my $7k in capital losses would offset all these cap gains, up to $7k?

I'm also trying to figure out if I'll owe the net investment income tax. Am I supposed to include my gross proceeds of this land sale in my AGI calculation, even though I will only pay cap gains on the proceeds - cost basis? When it comes to AGI, I'm guessing all income applies regardless of how the IRS taxes it, right?

[FiveK]

I have about $7k in capital losses to carryover to 2023. I expect $5k in capital gains taxes owed for this land sale. I will also have about $2k in dividend cap gains taxes. I assume my $7k in capital losses would offset all these cap gains, up to $7k?

Capital loss carryovers reduce current year capital gains, not current year capital gain taxes. E.g., if one has $5K in capital gain tax, assuming the 15% capital gain tax bracket, that implies a capital gain of $5K/15% = $33,333. The $7K capital loss carryover would be subtracted from the $33,333, not the $5K. Does that make sense?

I'm also trying to figure out if I'll owe the net investment income tax. Am I supposed to include my gross proceeds of this land sale in my AGI calculation, even though I will only pay cap gains on the proceeds - cost basis? When it comes to AGI, I'm guessing all income applies regardless of how the IRS taxes it, right?

AGI includes the amount on line 7 of form 1040, and that often comes from line 21 of Schedule D. Are you comfortable filling out Schedule D?

Alternatively, have you considered using one of the tax estimation tools that covers your situation?

[peteyboy]

I have two other questions:

I have about $7k in capital losses to carryover to 2023. I expect $5k in capital gains taxes owed for this land sale. I will also have about $2k in dividend cap gains taxes. I assume my $7k in capital losses would offset all these cap gains, up to $7k? Correct.

I'm also trying to figure out if I'll owe the net investment income tax. Am I supposed to include my gross proceeds of this land sale in my AGI calculation, even though I will only pay cap gains on the proceeds - cost basis? When it comes to AGI, I'm guessing all income applies regardless of how the IRS taxes it, right? AGI will only include cap gains income, not basis.

[Aguilar]

I have about $7k in capital losses to carryover to 2023. I expect $5k in capital gains taxes owed for this land sale. I will also have about $2k in dividend cap gains taxes. I assume my $7k in capital losses would offset all these cap gains, up to $7k?

Capital loss carryovers reduce current year capital gains, not current year capital gain taxes. E.g., if one has $5K in capital gain tax, assuming the 15% capital gain tax bracket, that implies a capital gain of $5K/15% = $33,333. The $7K capital loss carryover would be subtracted from the $33,333, not the $5K. Does that make sense?

I'm also trying to figure out if I'll owe the net investment income tax. Am I supposed to include my gross proceeds of this land sale in my AGI calculation, even though I will only pay cap gains on the proceeds - cost basis? When it comes to AGI, I'm guessing all income applies regardless of how the IRS taxes it, right?

AGI includes the amount on line 7 of form 1040, and that often comes from line 21 of Schedule D. Are you comfortable filling out Schedule D?

Alternatively, have you considered using one of the tax estimation tools that covers your situation?

Thanks, that makes sense about the carryover reducing cap gains, not cap gains taxes owed. Temporary lapse on my part.

I contacted FreeTaxUsa to ask if they provide a 2023 view for tax planning purposes. Otherwise, I could use their 2022 edition, knowing it’s a bit off from 2023 rates. I checked out a couple of the free estimation tools in that link but couldn’t find one where I could enter SSDI and my land sale.

[Aguilar]

I have two other questions:

I have about $7k in capital losses to carryover to 2023. I expect $5k in capital gains taxes owed for this land sale. I will also have about $2k in dividend cap gains taxes. I assume my $7k in capital losses would offset all these cap gains, up to $7k? Correct.

I'm also trying to figure out if I'll owe the net investment income tax. Am I supposed to include my gross proceeds of this land sale in my AGI calculation, even though I will only pay cap gains on the proceeds - cost basis? When it comes to AGI, I'm guessing all income applies regardless of how the IRS taxes it, right? AGI will only include cap gains income, not basis.

Previous poster said my carryover losses don’t offset capital gains taxes, just capital gains. So the info I stated above is all incorrect. You wrote Correct which has me second guessing here.

What do you mean by ‘not basis’? If my gross proceeds from the land sale are $75k and the cost basis is $40k, do I include $35k in my AGI calc?

[FiveK]

Thanks, that makes sense about the carryover reducing cap gains, not cap gains taxes owed. Temporary lapse on my part.

I contacted FreeTaxUsa to ask if they provide a 2023 view for tax planning purposes. Otherwise, I could use their 2022 edition, knowing it’s a bit off from 2023 rates. I checked out a couple of the free estimation tools in that link but couldn’t find one where I could enter SSDI and my land sale.

SSDI is treated exactly the same as SS. E.g., for the personal finance toolbox spreadsheet it would go in cell Calculations!B38; for capital gains/losses and capital loss carryovers, cells Calculations!D26, D27, M55, and M57.

[FiveK]

I assume my $7k in capital losses would offset all these cap gains, up to $7k? Correct.

Previous poster said my carryover losses don’t offset capital gains taxes, just capital gains. So the info I stated above is all incorrect. You wrote Correct which has me second guessing here.

Probably the "correct" was meant for the "I assume..." sentence quoted above.

What do you mean by ‘not basis’? If my gross proceeds from the land sale are $75k and the cost basis is $40k, do I include $35k in my AGI calc?

Yes. Full tax returns include both the proceeds and the basis (e.g., see Form 8949), but only the difference goes into AGI. Most (all?) tax estimation tools simply ask for the difference.

[peteyboy]

I assume my $7k in capital losses would offset all these cap gains, up to $7k? Correct.

Previous poster said my carryover losses don’t offset capital gains taxes, just capital gains. So the info I stated above is all incorrect. You wrote Correct which has me second guessing here.

Probably the "correct" was meant for the "I assume..." sentence quoted above. CORRECT!

What do you mean by ‘not basis’? If my gross proceeds from the land sale are $75k and the cost basis is $40k, do I include $35k in my AGI calc?

Yes. Full tax returns include both the proceeds and the basis (e.g., see Form 8949), but only the difference goes into AGI. Most (all?) tax estimation tools simply ask for the difference.

Response in RED in the quoted text above.

[Dregob]

With estimated taxes, there are four quarters that aren't really quarters.
But do you need to send in the amount you predict you will owe in each true quarter (total taxes/4).
Or do they expect Q1 (3/12 of taxes ) Q2 (2/12 of taxes) Q3(3/12 of taxes) and the Q4 (4/12 of taxes)?
Am I over thinking this? You would overpay in Q2 and underpay in Q4 with 4 equal payments.
Why not just have 4 actual 3 month quarters?

[Aguilar]

With estimated taxes, there are four quarters that aren't really quarters.
But do you need to send in the amount you predict you will owe in each true quarter (total taxes/4).
Or do they expect Q1 (3/12 of taxes ) Q2 (2/12 of taxes) Q3(3/12 of taxes) and the Q4 (4/12 of taxes)?
Am I over thinking this? You would overpay in Q2 and underpay in Q4 with 4 equal payments.
Why not just have 4 actual 3 month quarters?

I'm not sure. I'm still hunting for confirmation but I think you're supposed to assess tax liability for Q1 and if you expect to owe, you pay estimated taxes for that amount (if you have reason to be concerned about an underpayment penalty). In my case, the process for this land sale is likely to end mid-April and I should receive my portion shortly thereafter. This means my capital gains from the sale will apply in Q2 and thus the land sale wouldn't affect my first estimated tax payment of the year, just the second one.

[FiveK]

I'm not sure. I'm still hunting for confirmation but I think you're supposed to assess tax liability for Q1 and if you expect to owe, you pay estimated taxes for that amount (if you have reason to be concerned about an underpayment penalty).

Not necessary if you can meet your tax liability via withholding, regardless of when during the year the withholding occurs. See the safe harbors section linked earlier.