Where to put money for 12 months to pay tax on stock sale?

[Kayano_55]

Hi all,
I'm looking for some ideas on strategies for where to plunk down some money I know I will need to fork over to Uncle Sam next April 15th after selling some stock.  Besides a money market account that pays hardly anything, are there other thoughts on other vehicles to put the money into for 12 months to recoup some $$ (realizing I'll get taxed on any dividends/gains)?  Trying to lower the inflation hit if I can.

Thanks

[GreenGuava]

How much risk with this are you willing to take?

This is money you must, absolutely, have available to you by April 15 of next year -- whether this exact money or an equivalent amount.  If you aren't sure you can replace it if you lose it, I'd say an 11 month CD - get what little you can, for sure, but don't take any risk with it.

Otherwise, how much risk are you willing to take?  If you lose, say, 10% of the value seeking a higher yield, are you fine with making up for that out of pocket?  If so, there are various sliding scales:  anything from a short-term bond fund to a stock mutual fund (the latter of which could potentially lose a lot more than 10%!).

[marty998]

Probably doesn't apply to you but I've seen instances where the Aus tax office actually pays you interest if you have pre-paid your tax.

If I were in your situation I'd estimate a number being how much I could save throughout the year, use that number to pay off my current debts and then progressively save the required amount throughout the next year. (Hope that makes sense).

[shaunr]

I don't think inflation is an issue here.  Presumably you will owe the same amount of $ regardless of what happens with inflation.

That said, US income tax is pay-as-you-go.  You probably owe tax on your capital gains immediately:

http://www.irs.gov/taxtopics/tc306.html

There may be exemptions whereby the IRS will waive the underpayment fee which you can look into:  http://www.smartmoney.com/taxes/income/do-you-owe-estimated-taxes-9542/

I can't advise you specifically, but it's clear that they have specific penalties designed to punish you for doing this.  They want you to pay taxes immediately (or at least by the end of each quarter).  Instead, you are considering it an interest free loan.  Worse yet (in their eyes) you are planning on speculating with their money in risky investments.  (Anything paying substantially more than a CD is by definition risky).

If it were me, I would do the research to find out if I qualify for the "safe-harbor" guidelines.  If i were confident I qualify, I'd stick the money in a ~1% bank account or money market.  If I won't, or am not sure, I'd pay the taxes immediately.

[icefr]

If it was me, I would probably just increase my withholdings at work to account for this instead of making estimated payments. I'm not sure what tool to use (I have my own spreadsheets for this) since the IRS Withholding Calculator doesn't ask about capital gains.

[matchewed]

I'm no expert but as far as I understand it there is no inflation hit on taxes. The taxes are calculated independently of inflation. Inflation is the price of goods not the amount of money independent of the goods.

[Kayano_55]

Thanks all,
I'm having a serious conversation with myself over how risk tolerant I am at the moment.  Especially with the wild swings in the market these days. I have a call into my accountant about paying estimated taxes (and the possibility of deducting this from my 2014 taxes if I pay in 2013 - had a friend tell me about that one).  Leaning towards sticking it in an interest bearing checking account, but that's today - will let you know what I end up doing after talking with the accountant.

[Kayano_55]

Just wanted to follow up on this. . .spoke with my accountant and looks like I can adjust my witholdings to not have to pay out the estimated taxes. My plan is to stick it in an interest bearing Money Market at ~1%.  Super sad to have those greenback sitting there making a paltry 1%, but better than having to dish it out immediately (so no complainy pants here).  Thanks all for the comments.

[GreenGuava]

My plan is to stick it in an interest bearing Money Market at ~1%.

These still exist?