Author Topic: Do I have to pay an estimated tax on a windfall?  (Read 861 times)

Home Stretch

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Do I have to pay an estimated tax on a windfall?
« on: May 29, 2019, 01:53:58 PM »
If the windfall is from the sale of a business, do I have to pay estimated taxes between now and the end of 2019?

This link would seem to indicate yes: https://www.irs.gov/faqs/estimated-tax/large-gains-lump-sum-distributions-etc/large-gains-lump-sum-distributions-etc

The windfall is not guaranteed until the moment the money hits my bank account, so it's not like I could have "anticipated" the income any earlier in the year.

Ideally, I'd like to sock away the large amount that I'm going to have to pay in taxes in a custom CD or other guaranteed income-generating account until tax time in 2019.

I am going to talk to my accountant about this since it's such a large sum, but I like to arrive with some idea of what I'm talking about so that I can ask the right questions.

MoseyingAlong

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Re: Do I have to pay an estimated tax on a windfall?
« Reply #1 on: May 29, 2019, 02:25:17 PM »
What you want to do is use the safe harbor to avoid underpayment penalties and interest on the balance due.
So look at your 2018 tax return and note Line 15, the total taxes (not the balance due or withholding but your total taxes).
Then have tax withholding or estimated payments that equal or exceed 100% or 110% - depends on your income- of the 2018 total taxes.

If you can do it thru withholding, I think that's safer because they are considered paid throughout the year while estimated payments are dated.

That will protect you from underpayment penalties and you can stash the balance that will be due in a CD or higher interest savings account until next April.

And check on your state's requirements.

So questions for your accountant include:
What was your 2018 total tax?
Do you need to do 100 or 110%?
What are your state requirements?

HTH

Boofinator

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Re: Do I have to pay an estimated tax on a windfall?
« Reply #2 on: May 29, 2019, 02:59:43 PM »
You may want to pay your state income taxes this year rather than wait until April of next year (if you have the pleasure of having to pay state income taxes), as I believe those payments would be deductible on your federal return for the year during which they were paid.

Home Stretch

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Re: Do I have to pay an estimated tax on a windfall?
« Reply #3 on: May 30, 2019, 09:11:45 AM »
@Boofinator - Thanks, I had read about the state income tax strategy and that probably makes sense, as I live in a state with income tax and it should push us over the threshold of filing itemized taxes even with the higher standard deduction this year.


@MoseyingAlong - So let's say I paid $100k in total taxes last year, and since we're halfway through 2019 and my salary has been the same, I've paid 50k in taxes so far this year. Does this mean as long as I pay an additional $60k (110% does apply in my case) in estimated taxes over the next two quarters, I can consider the rest to be covered under the safe harbor rules?

seattlecyclone

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Re: Do I have to pay an estimated tax on a windfall?
« Reply #4 on: May 30, 2019, 10:55:48 AM »
@MoseyingAlong - So let's say I paid $100k in total taxes last year, and since we're halfway through 2019 and my salary has been the same, I've paid 50k in taxes so far this year. Does this mean as long as I pay an additional $60k (110% does apply in my case) in estimated taxes over the next two quarters, I can consider the rest to be covered under the safe harbor rules?

The safe harbor still requires you to make timely payments. I would say that if you paid 27.5% of last year's taxes by April 15th, and you make sure to pay that same amount by each of the other three quarterly deadlines, you should be in the clear.

Home Stretch

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Re: Do I have to pay an estimated tax on a windfall?
« Reply #5 on: May 30, 2019, 01:04:39 PM »
@seattlecyclone - Yeah my regular salary income is exactly the same as it was in 2018, so... cool! Still going to speak with a CPA, but now I'll be able to react appropriately if something sounds out of whack with what I already understand.

Thanks all.

dandarc

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Re: Do I have to pay an estimated tax on a windfall?
« Reply #6 on: May 30, 2019, 01:08:31 PM »
There is also the annualized income worksheet that can reduce or eliminate any penalty if your income is lumpy throughout the year.

So if miss the safe-harbor for whatever reason, you could fill that out when you do your taxes next year.