Estimated taxes for dividend income

[felizcortez]

I quit my job last year and am living off my investments.  I should have roughly 35k of dividend and interest income in 2020 as my sole income source.  I'm trying to figure out whether I need to pay estimated taxes or not and how I should go about figuring this out. 

I've read a few things with regards to maximizing your zero percent capital gain taxes on go curry cracker etc.  I would potentially take advantage of that income room to bump up my basis or do Roth conversions. 

Any advice is appreciated.

[MDM]

I should have roughly 35k of dividend and interest income in 2020 as my sole income source.

How much is
- interest or non-qualified dividends, vs.
- qualified dividends?

You could do a quick estimate of your taxes using the case study spreadsheet.

Then check if you fit into one of the safe harbor rules (in other words, if you are not one "Who Must Pay Estimated Tax"), then no estimated tax payments are needed.

[felizcortez]

If the qualified and nonqualified dividends are the same as last year.

Total ordinary dividends were about 30k and qualified dividends were about 24k.  I will take a look at the spreadsheet.

Interest was about 5k.

[MustacheAndaHalf]

I don't know in what order a standard deduction cancels qualified or non-qualified dividends.  Best case, it cancels qualified dividends first.  Worst case, it targets long-term dividends first (the kind of situation the IRS likes).

Worst case: $5k income canceled by standard deduction, $7 of qualified dividends also canceled.

That would leave $17k qualified dividends, but you'd be in the 0% long-term capital gains bracket, so 0%
And then your $6k in non-qualified dividends, which are in the 10% tax bracket... so $600 in the worst case, based on what you've mentioned.  It could be less if there's pro-rating.

I really like "IRS direct pay".  Search for that, and follow the irs.gov website link.  In general, don't trust anyone to give you links to paying the IRS.  That's why I'm just telling you what to search for...

You can tell the IRS to directly withdraw money from your bank account, and what you're paying (2020 estimated taxes), and the IRS withdraws the money.

[felizcortez]

Thanks for the replies.  So I'm married filing jointly so would that lower the total amount of tax due to the standard deduction?  Just trying to figure out whether I need to cut a check of not.

[MDM]

If the qualified and nonqualified dividends are the same as last year.

Total ordinary dividends were about 30k and qualified dividends were about 24k.  I will take a look at the spreadsheet.

Interest was about 5k.

Thanks for the replies.  So I'm married filing jointly so would that lower the total amount of tax due to the standard deduction?  Just trying to figure out whether I need to cut a check of not.

Quick estimate
Ordinary income = $6K non-qual div + $5K interest = $11
Qual div = $24K
MFJ std. ded. = $24.8K
Total taxable = $10.2K, all qual. div.
Top of MFJ 0% QD&LTCG bracket = $80K
Result = $0 federal tax

Spreadsheet should confirm - is that what you get also?

[terran]

With $24k of qualified dividends and $6k non-qualified as your only income you won't have any tax liability, so you don't need to worry about estimated taxes.

Do you have any traditional IRA balances? You might consider making some Roth conversions while keeping the conversions and the non-qualified dividends under the standard deduction, and you still won't owe any tax.

You might also consider doing some capital gains harvesting. If you keep all income (Roth conversion, qualified and non-qualified dividends, and long term capital gains capital gains) under about $104k you still won't owe any tax.

With both Roth conversions and capital gains harvesting, if you're on ACA insurance with a subsidy be careful as you might end up loosing some/all of your subsidy despite not owing income tax, which is basically another form of tax.

[felizcortez]

Thanks.  I do have about 600k in my 401k which I could convert to an IRA to do some Roth conversions from.

I'm currently in Mexico so I have expat health insurance so ACA isn't an issue currently. 

[felizcortez]

I should also note that i pay state taxes in California so that may be a consideration as well. 

[phildonnia]

I should also note that i pay state taxes in California so that may be a consideration as well.

Estimated taxes in California are basically the same as for federal, including the safe harbor rules. 

But there's one important difference: The amounts due are allocated to the quarters 30%, 40%, 0%, 30% (unlike federal which is 25% each quarter).  Any wage withholding is also allocated the same way if you don't use the "actual withholding amounts" method.

[seattlecyclone]

I just FIREd last year as well. Going forward I don't expect to owe federal income tax at least until my kids turn 17, but I had the IRS keep $1 more than the safe harbor amount out of my refund this year just in case. So far that interest-free loan is one of my better-performing investments this year.

[felizcortez]

I should also note that i pay state taxes in California so that may be a consideration as well.

Estimated taxes in California are basically the same as for federal, including the safe harbor rules. 

But there's one important difference: The amounts due are allocated to the quarters 30%, 40%, 0%, 30% (unlike federal which is 25% each quarter).  Any wage withholding is also allocated the same way if you don't use the "actual withholding amounts" method.

So what you are saying is I would owe 70% of the taxes for California halfway through the year?

[felizcortez]

I just FIREd last year as well. Going forward I don't expect to owe federal income tax at least until my kids turn 17, but I had the IRS keep $1 more than the safe harbor amount out of my refund this year just in case. So far that interest-free loan is one of my better-performing investments this year.

My safe harbor tax amount based on last year's income would be quite a bit because I sold a bunch of company stock before I quit.  So my income will be significantly different this year vs last year.

[LightStache]

I should also note that i pay state taxes in California so that may be a consideration as well.

Estimated taxes in California are basically the same as for federal, including the safe harbor rules. 

But there's one important difference: The amounts due are allocated to the quarters 30%, 40%, 0%, 30% (unlike federal which is 25% each quarter).  Any wage withholding is also allocated the same way if you don't use the "actual withholding amounts" method.

So what you are saying is I would owe 70% of the taxes for California halfway through the year?

Yep, although they are pushed back this year due to COVID. If you're living abroad, why didn't/don't you establish residence in a non-sticky state first so you don't have to pay CA tax?

[phildonnia]

I should also note that i pay state taxes in California so that may be a consideration as well.

Estimated taxes in California are basically the same as for federal, including the safe harbor rules. 

But there's one important difference: The amounts due are allocated to the quarters 30%, 40%, 0%, 30% (unlike federal which is 25% each quarter).  Any wage withholding is also allocated the same way if you don't use the "actual withholding amounts" method.

So what you are saying is I would owe 70% of the taxes for California halfway through the year?

It's worse than that: you owe 70% of your estimated taxes 5/12 of the way through the year.

[MustacheAndaHalf]

Ah, California's tax people.  They are very aggressive, with the goal of showing you're still a CA resident who only moved temporarily.  If you move back to California, expect them to demand back taxes for the time you were still a resident (according to them) but just in Mexico temporarily.

If you have property in California, those ties will be used to show you were planning to return.  For example, owning CA real estate, renting a storage locker, or a car kept in storage in CA.  If you renew your CA driver's license, or vote in a statewide election - all of these suggest you're still a resident.  The CA tax board will weigh it up and go after someone who didn't pay CA taxes for years.

Assuming you moved last year, that would mean 2020 could be your first full year in Mexico.  When you file taxes next near (for 2020), in my lay opinion, file CA taxes for $0.  Throw down the gauntlet and make CA decide if they want to pursue you in year one - not after you have years of taxes they view as unpaid.  If you move back to CA, and not to some other state, they are very likely to demand back taxes for every year you lived "temporarily" (in their view) in Mexico.

[LightStache]

When you file taxes next near (for 2020), in my lay opinion, file CA taxes for $0.  Throw down the gauntlet and make CA decide if they want to pursue you in year one - not after you have years of taxes they view as unpaid.  If you move back to CA, and not to some other state, they are very likely to demand back taxes for every year you lived "temporarily" (in their view) in Mexico.

This is terrible advice.

[MustacheAndaHalf]

So what you are saying is I would owe 70% of the taxes for California halfway through the year?

Yep, although they are pushed back this year due to COVID. If you're living abroad, why didn't/don't you establish residence in a non-sticky state first so you don't have to pay CA tax?

It sounds like you were suggesting OP move someplace they don't want to live, establish residence there, and then move to Mexico.  Why suggest that burden without explaining why it is necessary?

When you file taxes next near (for 2020), in my lay opinion, file CA taxes for $0.  Throw down the gauntlet and make CA decide if they want to pursue you in year one - not after you have years of taxes they view as unpaid.  If you move back to CA, and not to some other state, they are very likely to demand back taxes for every year you lived "temporarily" (in their view) in Mexico.

This is terrible advice.

Why?

I'm saying OP should file taxes of $0 when they owe $0 in taxes.
Or maybe we disagree that CA is very aggressive about pursuing back taxes:

"Generally, California doesn't easily relinquish its claims of legal residency just because a resident leaves the state for employment purposes.  This is true even if the job is out of the country. Rather California weighs all the taxpayer's continuing connections with California."
http://www.calresidencytaxattorney.com/residency-tax-news/overseas-job-doesn-t-equal-nonresidency