With the stock run-up, I recently sold a lot of shares for 400K+ in mostly long term gains. I am apprehensive of the tax bill that I will have to pay next April but also realized that I could be facing a large underpayment penalty from the IRS if I don't take action. I've already worked with the AI chatbots to figure out my strategy for withholding enough from my W2 paycheck to avoid the penalty – but, honestly, I don't trust AI fully for obvious reasons.
I calculated how much I would have to withhold this year based on last year. From form 1040 (federal) and 1040N (state), I went to line 24 for the former and found 21551 USD as last year's federal income tax. Did similar for state tax and it was 8114 USD.
Now, I am going to multiply these numbers by 110 percent and make sure I withhold an equal or higher amount for state and federal respectively this year from my W2 salary. This would mean that I would have to essentially withhold the full last 4 months of salary because my income is pretty modest as a medical resident (approx 75K/yr).
1) Am I doing this right? Anything else I should consider?
2) Is it permissible to significantly back-load the withholding like this? I figure that this would be more financially advantageous to me if allowed (so that I can collect more interest during the year).
3) Does the IRS automatically check that I've withheld sufficiently, or do I have to notify them of this?
Thank you for your guidance
Big cap gains, Applying Safe Harbor Rule
byu/shoenberg3 intax
Posted by shoenberg3
4 Comments
Sounds like you’ve got it pretty much right. If you don’t want to fool with the withholding, you can also make an estimate payment directly to the IRS.
You can also google IRS Form 2210 (this is where you calculate the penalty) and work through it to be sure you’ve got it right.
Remember too, the penalties apply based on how far off you are. So if you get “pretty close”, but you’re slightly underpaid, your penalty is only based on how much you’re underpaid—you don’t get a $50k penalty because you were $5 short.
1. Yes, 110% of line 24 is what you need to withhold for federal, in even installments throughout the year. So, ~$6K per quarter. The first quarterly estimated payment was due April 15th, so if you haven’t already, make sure to pay any shortfall vs. your W-2 withholding as soon as possible.
2. As long as you meet the safe harbor rule and pay in even installments by the required due dates, you’ll avoid the underpayment penalty when you file.
3. The IRS will receive the estimated payments. That’s all the notification they need.
State safe harbor rules may vary, so make sure to check your state’s rules.
Do you even need to pay 110%. I thought that was only of income is over $150,000 for the prev year.
You have a couple of approaches. Can make your withholding do 100 or 110% of last year, or 90% of this year. Check but I think it assumes any withholding is “timely”. The other option is to do estimate tax payment. The rule is that you estimated tax payments must be timely. Timely generally means paid in 4 equal quarters which you probably cannot do at this point, or it means that your quarterly payments fully cover the quarters before. You have to look at the penalty form (2210?) and schedule AI to see how this is actually done. Basically it amounts to calculating your tax 5 times during the year (the 4 quarters and then the final return). I’m doing big Roth conversions in Q4, so I’m doing that each year for now. It is doable but painful.