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I expect to sell my second home this year and make a profit, therefore I will owe Long Term Capital Gains. Putting that into TaxCut software when planning tax for next year it suggests a fairly small estimated tax payment for each quarter plus a large withholding on my job income.

I'm wondering why the payments were split this way and what the advantages and disadvantages for each method are. Does it matter when in the year the sale occurs?

Note: for myself it would seem better to increase the estimated tax payments as I can pay those from the money received from the sale, while I don't want the extra withholding affecting my income until I actually sell the house. But there may be something I'm not considering.

I'm in the US.

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    What country are you in? That's important for any tax related question here. – JoeTaxpayer Jan 30 '16 at 20:39
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You have made a good start because you are looking at your options.

Because you know that if you do nothing you will have a big tax bill in April 2017, you want to make sure that you avoid the underpayment penalty.

One way to avoid it is to make estimated payments. But even if you do that you could still make a mistake and overpay or underpay.

I think the easiest way to handle it is to reach the safe harbor. If your withholding from your regular jobs and any estimated taxes you pay in 2016 equal or exceed your total taxes for 2015, then even if you owe a lot in April 2017 you can avoid the underpayment penalty. If you AGI is over 150K you have to make sure your withholding is 110% of your 2015 taxes. Then set aside what you think you will owe in your bank account until you have to pay your taxes in April 2017.

You only have to adjust your withholding to make the safe harbor. You can make sure easily enough once your file this years taxes. You only have to make sure that you reach the 100% or 110% threshold.

From IRS PUB 17

Who Must Pay Estimated Tax

If you owe additional tax for 2015, you may have to pay estimated tax for 2016.

You can use the following general rule as a guide during the year to see if you will have enough withholding, or if you should increase your withholding or make estimated tax payments.

General rule. In most cases, you must pay estimated tax for 2016 if both of the following apply.

  1. You expect to owe at least $1,000 in tax for 2016, after subtracting your withholding and refundable credits.

  2. You expect your withholding plus your refundable credits to be less than the smaller of:

    a. 90% of the tax to be shown on your 2016 tax return, or

    b. 100% of the tax shown on your 2015 tax return (but see Special rules for farmers, fishermen, and higher income taxpayers , later). Your 2015 tax return must cover all 12 months.

Reminders

Estimated tax safe harbor for higher income taxpayers. If your 2015 adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you must pay the smaller of 90% of your expected tax for 2016 or 110% of the tax shown on your 2015 return to avoid an estimated tax penalty.

  • I will definitely aim for the safe harbor of 100% of 2015 tax in withholding. However I am curious about the first comment "if you owe additional tax for 2015". If I get a refund in 2015, does that mean I would be safe anyway? – Dragonel Feb 3 '16 at 3:29
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The estimated approach puts more burden on you to get it right. Depending on when in the year you make the sale, it may or may not have advantages to you in addition. Other than the responsibility of ensuring that you make the payment on time, the pros and cons seem to be:

  • As an estimated payment, you can hold potentially hold your money longer, making one big payment at the end of the quarter where you have the sale. You might not even need to make estimated payments in the other quarters, depending on your overall tax situation, since the sale is a one-time event. The potential con here is that estimated payments are credited to the quarter in which they are made. If you don't have enough cash on hand to make this payment in that quarter, you'll be stuck.
  • As withholding, the default treatment is for your total withholding to be treated as if it were held evenly throughout the year. If you plan it out carefully, you might be able to use this to your advantage such that withholding later in the year is paying tax that otherwise would have been due as an estimated payment much earlier. The downside, of course, is that this may or may not reduce your weekly income prior to the sale, depending on how you schedule the extra withholding. (There is an option to annualize and get credit for your withholding when it was actually withheld if that's advantageous to you, although it's some extra work, may also require annualizing your income, and probably isn't helpful in the scenario described.)

Either strategy is legitimate. It depends on when in the year you have the sale, how sure you are of the sale, and just your personal preference on how to get this done. Your total tax due for the year will not be different (as long as you pay in such as way that you don't incur late penalties in any quarter).

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