Estimated tax payment and avoiding penalty? Worth bothering about?

[Roland of Gilead]

I have been wildly successful in my little trading account this year so far.

While it is possible I could have a loss there for the year, it is getting very unlikely.

The account started the year at $90,000 and currently is $170,000, with $53,000 of realized gain and $46,500 of unrealized gain (rough figures)

I am hoping the unrealized gain can be long term if the investments do not get bought out by my purchase date anniversary (Sept) but the realized gain is all short term stuff.  Additionally I am hoping to not realize the long term $46,500 until next year or even spread out over two years.

But anyway, so I have $53,000 in gain so far and have paid zero tax.   I have been playing around with 2017 tax software to try and figure out what type of penalty I would have when I do taxes in 2019 if I end the year with about $58,000 in gains and having paid no tax.

I can make an estimated tax payment now if the penalty is going to be large, but if it is small, like under $100 then I would not bother.

Last year we owed about $950.

Any idea?  Married filing jointly and I think we will owe about $10,000 in tax for 2018 total.

[MDM]

Use the short method of 2017 Form 2210 - f2210.pdf (lines 1-17) for a quick estimate.

[sokoloff]

You could make an estimated payment or payroll withholding up to the “safe harbor” limit and be good.

I find the penalties for under-withholding to be “fair enough” that I don’t go to great lengths to avoid them, but the safe harbor tests are the easiest way to avoid.

[jacoavluha]

What was your AGI last year? More or less than $150k?

Is this your only income? Or do you have a regular job where withholdings are taken from pay?

[Roland of Gilead]

Our income last year was around $33k.  We are early retired and I try to keep it near $24k but keep making money accidentally in investments.   We don't have W2s.

Not familiar with the safe harbor thing.  I was thinking about going to the IRS site and just paying a few thousand as an estimated payment but wouldn't bother if I am only going to get hit with like $30 in penalties next year.

[jacoavluha]

With a prior year AGI under $150k you can make one tax payment of 100% of the total tax you owed last year, and guarantee you will pay no penalty this year, even if your tax due is significant.

The other safe harbor is to pay at least 90% of your current year tax due but this would be more than the above option.

[MDM]

With a prior year AGI under $150k you can make one tax payment of 100% of the total tax you owed last year, and guarantee you will pay no penalty this year, even if your tax due is significant.

This won't work if it is an estimated tax payment made late in the year.

R of G, have you tried the short method of form 2210?

[Roland of Gilead]

I did look at the short method of 2210 just now but don't have exact figures in front of me.

It looks like though the penalty is around 3% of the underpayment amount, so for example if we were found to owe $10,000 the penalty would be about $300.

Alternatively, I could invest that $10,000 in the same account and make $7,000 more, then pay the penalty out of that $7,000 (I guess at that point it would be a $510 penalty).   Essentially the IRS is loaning me money at 3% if I don't make an estimated tax payment?

[MDM]

Essentially the IRS is loaning me money at 3% if I don't make an estimated tax payment?

4%, but that's an annualized number and assumes you incur tax liability steadily during the year.

Note that this situation is somewhat different than comparing investing vs. pre-paying a 4% mortgage.  With the mortgage there is usually a much longer time horizon so one can reasonably expect long term average market results.

With income tax, the IRS wants full payment of your "debt" each April 15.  In addition to the 4% for late estimated taxes, there is an additional 6% for late payment of all taxes.  See Understanding Penalties and Interest | Internal Revenue Service for more. 

Also note that your investment returns may be hit by short term capital gain taxes if you have to sell to pay in April.  It's certainly possible to come out ahead by using the "IRS loan", but not as likely as with long term investing vs. mortgage payments.

[Roland of Gilead]

Thanks.  I think I understand it now.   Since last year we only owed a bit over $900 though, it seems if I make a quarterly payment right now of $1000 I would owe no penalty even if we end up owing $10,000 or more?

Is it too late to make that $1000 payment? I think the next deadline is in June...

[MDM]

Thanks.  I think I understand it now.   Since last year we only owed a bit over $900 though, it seems if I make a quarterly payment right now of $1000 I would owe no penalty even if we end up owing $10,000 or more?

Is it too late to make that $1000 payment? I think the next deadline is in June...

If the bulk of your tax liability was incurred in the first quarter, but you did not make a 1Q estimated payment, no amount of estimated payments for quarters 2-4 will prevent a penalty for 1Q underpayment.  If you can have taxes withheld, however, then you can avoid any penalty by having sufficient withholding, regardless of when during the year the withholding occurs.

[jacoavluha]

Just make the safe harbor payment now.

[Roland of Gilead]

Just make the safe harbor payment now.

So if our income in 2017 was less than $150,000 (it was), then our safe harbor payment is to pay 100% of the 2017 tax that was due? (about $950 is what we owed in 2017)

And you can make that safe harbor payment now, even if about 40,000 of the 53,000 in income we made this year so far was realized in the first quarter?

[MDM]

...our safe harbor payment is to pay 100% of the 2017 tax that was due? (about $950 is what we owed in 2017)

Just checking: the safe harbors, with the exception of "owe less than $1000 when filing", all refer to the entire year's tax, and not just the amount one owes when filing.  Wasn't sure if that was clear.

See Form 2210.... ;)

[secondcor521]

Just make the safe harbor payment now.

So if our income in 2017 was less than $150,000 (it was), then our safe harbor payment is to pay 100% of the 2017 tax that was due? (about $950 is what we owed in 2017)

And you can make that safe harbor payment now, even if about 40,000 of the 53,000 in income we made this year so far was realized in the first quarter?

If your income in 2017 was less than $150K (which you say it was), then your safe harbor payment is 100% of the total tax in 2017.  Note that it's 100% of line 63 (the total tax), not 100% of line 78 (the amount you owe).

If you make the safe harbor payment now, that might reduce the amount of interest and penalties because you're making it sooner rather than later.  But I think only withholding (from either payroll or withholding on an IRA distribution) can actually absolve you of interest and penalties.  For whatever reason, withholding is treated differently under the rules.

[Catica]

Our income last year was around $33k.  We are early retired and I try to keep it near $24k but keep making money accidentally in investments.   We don't have W2s.

Not familiar with the safe harbor thing.  I was thinking about going to the IRS site and just paying a few thousand as an estimated payment but wouldn't bother if I am only going to get hit with like $30 in penalties next year.

I want to know how you keep money accidentally in investments?  I'd love to make money accidentally. 

[Roland of Gilead]

I want to know how you keep money accidentally in investments?  I'd love to make money accidentally.

The companies I invested in keep getting bought out, forcing me to take profit short term.

Juno was the latest.  I bought at $35 and it got bought out for $87 a few months later.

[Roland of Gilead]

Update:  I made the 2nd quarter estimated tax payment (went ahead and paid $2500 and the IRS cashed the e-check the same night...they must be hard up!)

I have made $7k more though since then doing some little bio swing trades so glad I went ahead and sent them the dough.

[MustacheAndaHalf]

Another option is to use "irs direct pay" to make estimated payments.  You need to prove your identity, and provide your bank info for the IRS to do a direct transfer - but you decide the amount.  You can visit the IRS website and search for "direct pay" or rely on Google.  When transferring a lot of money, though, don't trust links from websites or posts like this one.  :)

[Roland of Gilead]

Another option is to use "irs direct pay" to make estimated payments.  You need to prove your identity, and provide your bank info for the IRS to do a direct transfer - but you decide the amount.  You can visit the IRS website and search for "direct pay" or rely on Google.  When transferring a lot of money, though, don't trust links from websites or posts like this one.  :)

Yes, I did the direct pay today again...sent another $3000 to the IRS :-(

I have been making much more money trading recently than I thought possible...so the IRS is getting rich off me.