How to pay Estimated tax - one time Capital Gains in 2019

[dundee]

Dear Mustachians:

For the first time in life, I sold some positions (individual equities and mutual funds) from my brokerage account. The net proceeds were $173,000. Cost Basis was $113,000. All positions were several years old. I plan to reinvest in index funds. However, in order to avoid Underpayment penalty in 2020, I would like to make Estimated tax payment. I sold the positions on 15 March, 2019. Can you please answer the following questions:

1. Is it correct that I need to make Estimated tax payment using 1040 ES?

2. From simple calculation, my Long Term Capital Gains are $60,000. I will be in 15% Capital Gains bracket. So, it it correct that the estimated taxes will be 60k x 0.15 = $9,000?

3. Do I have to make the payment by April 15?

4. Do I use the IRS Direct Pay site to make the payment?

5. As a proof of my Estimated Payment, do I keep the receipt from IRS - in case there is an audit in 2020?

I gathered the above information from reading various sites, but, it was difficult to get good answers. I am sure the experts Mustachians will help answer my questions.

Thank you.

[secondcor521]

Answers:

1.  You can avoid underpayment penalties by meeting any of what are called the "safe harbor" rules.  There are at least three different safe harbor rules.  One of the safe harbor rules is paying in at least 100% (or 110% if your AGI was above $150K) of your 2018 taxes due, either through withholding from your job or estimated tax payments.  Another of the safe harbor rules is paying in at least 90% of your 2019 taxes due, again either through withholding or estimated tax payments.

If you do not meet any of the safe harbor rules, then you must make estimated tax payments to avoid the underpayment penalty.

If you choose to make estimated tax payments, then yes, you would use the payment vouchers at the end of Form 1040-ES.

2.  You're correct in that the estimated taxes due to your LTCG would be $9K.  The IRS looks at your whole income picture in determining taxes and estimated taxes, so you would want to account for your other income too (job, pension, SS, etc.).  If your other sources of taxable income have enough withheld, then yes, you can just pay the $9K.

3.  Estimated taxes are due four times per year.  The first estimated tax payment due date is April 15.  The other dates are listed in Form 1040-ES.  So you could pay $9K by April 15 or you could pay $9K/4 = $2,250 on each of the four due dates.

4.  You can if you want.  Or you can mail a check.  Or any of the other methods listed in the instructions for Form 1040-ES.

5.  Keep whatever proof of payment you have.  Either a copy of the canceled check, or a receipt from Direct Pay, or whatever receipt is given based on your method of payment.  Unless you have an unusual situation, though, paying estimated taxes probably won't increase your chance of an audit any appreciable degree AFAIK.

[MDM]

1.  You can avoid underpayment penalties by meeting any of what are called the "safe harbor" rules.  There are at least three different safe harbor rules.  One of the safe harbor rules is paying in at least 100% (or 110% if your AGI was above $150K) of your 2018 taxes due, either through withholding from your job or estimated tax payments.  Another of the safe harbor rules is paying in at least 90% of your 2019 taxes due, again either through withholding or estimated tax payments.

Careful here - estimated tax payments do not get one into any of the "safe harbors." Reaching one of those safe harbors makes estimated payments unnecessary.

See safe harbor rules for the IRS wording, under "Who Must Pay Estimated Tax."

As it happens, making an estimated tax payment in the first quarter (as Form 2210 defines "quarters") can avoid penalties just as well as withholding can (although one may have to file Schedule AI).  But if one needs to "catch up" later in the year, only withholding can do that.  One could overpay by $1 million in the 4th quarter using an estimated tax payment and still owe late payment penalties for quarters one through three.

[phildonnia]

Dear Mustachians:

For the first time in life, I sold some positions (individual equities and mutual funds) from my brokerage account. The net proceeds were $173,000. Cost Basis was $113,000. All positions were several years old. I plan to reinvest in index funds. However, in order to avoid Underpayment penalty in 2020, I would like to make Estimated tax payment. I sold the positions on 15 March, 2019. Can you please answer the following questions:

1. Is it correct that I need to make Estimated tax payment using 1040 ES?

You can do it online at irs.gov, if you'd rather not send in forms.

2. From simple calculation, my Long Term Capital Gains are $60,000. I will be in 15% Capital Gains bracket. So, it it correct that the estimated taxes will be 60k x 0.15 = $9,000?

Estimated taxes must be paid on the entire tax liability, not just specific bits of taxable income.  If the extra $60k puts you into a higher tax bracket, then your taxes as a whole will increase by more than just the 15%.  Your best bet is to use the "safe harbors" detailed in other answers.  For example, just make sure you pay 100% of the prior-year tax in withholding and estimated payments, spread out over the four "quarters".   (110% if your prior-year AGI is over $75k).  If you do that, you can underpay a million dollars and still pay no penalties.

But don't stress too much about being exact.  If you don't pay enough, the penalty is essentially 6% interest.  So if you underpay a few hundred dollars, the penalty is going to be some small change.  Not that you should pay interest if you don't want to, but your idea of paying 15% of the gain in one payment is probably going to be close enough without agonizing about it.

3. Do I have to make the payment by April 15?

Your liability is assumed to be allocated evenly to each "quarter", regardless of when you earned it.  (Unless you use the "annualized installment method" which is a big pain in the ass.)  So you really only need to pay 25% of the required amount each quarter.  (Warning: States have different rules on this.  What the hell, California?!)

But it's perfectly legal to pay it all in the first quarter, if you just want to get it out of the way.

4. Do I use the IRS Direct Pay site to make the payment?

Yep, see point 1 above.

5. As a proof of my Estimated Payment, do I keep the receipt from IRS - in case there is an audit in 2020?

Keep all your records.  If you use the online option, you will get an email receipt with a confirmation number.  You can also get an account at irs.gov, where you can go look at your payments and get transcripts, and all that fun stuff.  But even if you somehow lost your records, it shouldn't be too hard to prove that you made a payment.  But keep your records anyway.

[secondcor521]

1.  You can avoid underpayment penalties by meeting any of what are called the "safe harbor" rules.  There are at least three different safe harbor rules.  One of the safe harbor rules is paying in at least 100% (or 110% if your AGI was above $150K) of your 2018 taxes due, either through withholding from your job or estimated tax payments.  Another of the safe harbor rules is paying in at least 90% of your 2019 taxes due, again either through withholding or estimated tax payments.

Careful here - estimated tax payments do not get one into any of the "safe harbors." Reaching one of those safe harbors makes estimated payments unnecessary.

See safe harbor rules for the IRS wording, under "Who Must Pay Estimated Tax."

Ah.  I was going off the language here:

https://www.irs.gov/individuals/understanding-your-cp30-notice

"How much am I required to pre-pay in order to avoid a penalty?
You are generally required to pre-pay at least 90% of your tax either by having the tax withheld from your income, or by making timely estimated tax payments. A penalty will also not be charged if you pre-pay a "safe harbor" amount equal to 100% of the previous year's tax. However, special rules exist for certain taxpayers:
Qualifying farmers and fishermen are required to pre-pay only 2/3 (66.67%) of their tax, or the safe harbor amount, whichever is less. You are a qualifying farmer/fisherman if at least 2/3 of your gross income in either the current or previous year is or was derived from farming or fishing. See Farmers and Fishermen in Publication 505 for more information.
The safe harbor amount for high income taxpayers is 110% of the previous year's tax. You are a high income taxpayer if your previous year's adjusted gross income was $150,000 or more ($75,000 or more if you were married, filing a separate return).
You also will not be charged a penalty if your total tax due, after withholding, is less than $1,000, or if you had no tax liability for the previous year."

[dundee]

Thank you everybody for your detailed answers. This helps me a lot.

Thanks again for taking the time.... always a wealth of knowledge here.

[MDM]

You are generally required to pre-pay at least 90% of your tax either by having the tax withheld from your income, or by making timely estimated tax payments.

Yes, it's that "timely" part that can be misleading.

Assuming, for example, that "timely" means "by the end of the year" would be reasonable but not correct.  The IRS wants to "settle up" each quarter, but it does make an exception for withholding.