Paying taxes on capital gains

[dragonwalker]

I may find myself in a situation soon where I would be selling some of my stocks to come up for the money for a down payment on a home. I am looking at selling a significant portion of what I have in Apple which I got at a cost basis of $20,000 and is around $140,000. I'm looking to sell $65K worth so I believe that's going to come out to a long term capital gain of $55K so in federal about $8250 in additional taxes for this year. Do I have to make estimated quarterly payments to the IRS?

I'm a bit confused because what I read is that if I made under $150K which I do I just have to make sure that only 100% of my 2019 amount I paid in taxes is paid. If my AGI is expected to be about $50K in 2020 with gross $62K are there any taxes on the federal level I'm missing beside long term capital gains for gaining 55K? Thanks. 

[MustacheAndaHalf]

Ideally you would plan this at the end of last year, in case it would help you to split the sale across 2020 and 2021.  That's something to consider for the future.

Your income isn't taxed as long-term capital gains (LTCG), but it impacts where those gains are taxed.  There's a hidden tax bracket at $200k(single, $250k married) that adds an extra 3.8%.  So if you made close to that level of income, some of the LTCG may be taxed at 18.8%.

You can avoid a penalty for not paying estimated tax if you pay "100% of the tax shown on the return for the prior year", to quote the IRS.
https://www.irs.gov/taxtopics/tc306

Using IRS Direct Pay is pretty easy, so that's another option (do your own search - never trust a link in a forum for where you pay taxes!).  The first estimated payment date is when taxes are due, so you could pay part of it then.

[dragonwalker]

Ideally you would plan this at the end of last year, in case it would help you to split the sale across 2020 and 2021.  That's something to consider for the future.

Your income isn't taxed as long-term capital gains (LTCG), but it impacts where those gains are taxed.  There's a hidden tax bracket at $200k(single, $250k married) that adds an extra 3.8%.  So if you made close to that level of income, some of the LTCG may be taxed at 18.8%.

You can avoid a penalty for not paying estimated tax if you pay "100% of the tax shown on the return for the prior year", to quote the IRS.
https://www.irs.gov/taxtopics/tc306

Using IRS Direct Pay is pretty easy, so that's another option (do your own search - never trust a link in a forum for where you pay taxes!).  The first estimated payment date is when taxes are due, so you could pay part of it then.

Hi I know my regular income isn't taxed as a LTCG but do you mean to say that my capital gains from sale of stock are? When it's stated I can avoid penalty by paying 100% of the tax shown on my return in my prior year does that mean I have until the end of this year to do it and then can I do it through my withholdings? Again, do I have to pay estimated. If I did this early in the year would the estimated just be 15% of gains on 55K so $8200 split into 4 for each quarter?

[Paul der Krake]

Ideally you would plan this at the end of last year, in case it would help you to split the sale across 2020 and 2021.  That's something to consider for the future.

Your income isn't taxed as long-term capital gains (LTCG), but it impacts where those gains are taxed.  There's a hidden tax bracket at $200k(single, $250k married) that adds an extra 3.8%.  So if you made close to that level of income, some of the LTCG may be taxed at 18.8%.

You can avoid a penalty for not paying estimated tax if you pay "100% of the tax shown on the return for the prior year", to quote the IRS.
https://www.irs.gov/taxtopics/tc306

Using IRS Direct Pay is pretty easy, so that's another option (do your own search - never trust a link in a forum for where you pay taxes!).  The first estimated payment date is when taxes are due, so you could pay part of it then.

Hi I know my regular income isn't taxed as a LTCG but do you mean to say that my capital gains from sale of stock are? When it's stated I can avoid penalty by paying 100% of the tax shown on my return in my prior year does that mean I have until the end of this year to do it and then can I do it through my withholdings? Again, do I have to pay estimated. If I did this early in the year would the estimated just be 15% of gains on 55K so $8200 split into 4 for each quarter?

Withholding extra at your job instead of doing estimated payments is allowed. The IRS doesn't care how it's getting money so long as you don't underpay by too much. State taxes, if applicable, may be different.

If you go the estimated payments route, you are supposed to "pay as you go". So if you sell in May, you'd want to send the chunk of the ES payment before the Q2 deadline.

[MustacheAndaHalf]

Three ways to avoid the estimated tax penalty, your pick:
(1) pay all that's owed in estimated taxes.  I like to pay in Apr and Dec, and oddly it seems to work.
(2) pay at least as much as last year.  If you owed $10k last year, make sure you've paid at least $10k this year (with W-2 withholding or estimated taxes)
(3) pay 90% of what you owe this year.  Maybe you owed $30k last year, but this year you only owe $20k.  You need to pay at least $18k to avoid penalties.

As to how long-term capital gains are calculated, think of it as subtracting the end point from the starting point, which almost never starts at zero.  Someone with $100k income paying $50k in long-term gains, would take the tax owed on $150k and subtract the tax owed on $100k.  If it's all under $200k, it doesn't matter much.

But someone with $420k income has to compare $470k minus $420k.  They pay about $30k at the 20% tax rate, and about $20k at the 15% tax rate.  The capital gains tax stands on top of regular income to determine the bracket.  Note in this case, there's also the "net investment income tax" of 3.8% on all gains over $200k, so the effective capital gains tax rates are 18.8% and 23.8%.

[cool7hand]

+1 on trying to split this over two calendar years when possible

[phildonnia]

I'm a bit confused because what I read is that if I made under $150K which I do I just have to make sure that only 100% of my 2019 amount I paid in taxes is paid.

That's correct, assuming married filing jointly.  The threshhold for a higher safe-harbor is $75,000 for single or MFS. 

Keep in mind, this only protects you from underpayment penalties, not from owing the tax.  You will still have to pay the taxes in April 2022, on your capital gains for for 2021.  You might get a surprise if you thought that everything was taken care of just because the estimated tax was paid up.  So make sure to set aside something to pay the taxes then.