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I would like to sell stock valued at $X for combined long-term capital gains of around $Y. The sale would be in July. I expect the tax on the gains alone to be well over $1,000.

When you're in the middle of a tax year and you make significant extra (investment, say) income that you weren't planning on earlier in the year, how do you have to pay federal income tax on that income? For states with income tax, does it typically work similarly?

I plan on talking to a CPA or advisor but I'd like to get an idea of what to expect. Do I send a lump sum payment by the next quarterly payment due date? Do I do nothing and pay the balance when filing my 2017 return (with or without penalty/interest)?

Assume upper middle income household, long-term capital gains of around 1/3 of regular household salaried income, withholdings on salary cover 100% of prior year tax and 65-75% of current year tax due.

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I'm assuming your talking USA.

There are two ways to look.

  1. If you know you should pay on the cap gains, the best way to handle that separately from your salary is to file a quarterly tax payment. That, I understand, is what the self-employed have to do.

  2. I'm in the situation where at some point, probably this year, the company that employs me will be bought out, and I will owe capital gains taxes on my shares gobbled up in the buy-out. It's a cash-for-stock transaction. So, in my case, I've just adjusted my W-4 to take advantage of the safe-harbor provision related to taxes I payed in 2016 and my salary. The details vary depending on your situation, but in my case, I've calculated what it will take in W-4 allowances to make sure I pay 110% of my 2016 tax payment (after refund). I'm not worrying about what the actual taxes on those shares of company stock will be, because I've met the rules for safe-harbor.

Safe harbor just means that they can't penalize you for under-withholding or underpayment. It doesn't mean I won't have to write a check on april 15.

  • +1 Just to clarify - you are saying I can either (a) make the quarterly estimated tax payment or (b) adjust withholdings so that the total amount withheld in 2017 puts me in the safe harbor provision (e.g., by ensuring that I have 110% of 2016 withholdings withheld in 2017)? If I make an estimated tax payment and underestimate, but still have more than, say, 110% of last year's tax withheld, does that qualify for safe harbor? – Patrick87 Jun 21 '17 at 14:25
  • Note that the 110% only applies if your income is over $150K (after deductions), otherwise it's 100%: irs.gov/publications/p17/ch04.html#en_US_2016_publink100032429 – jamesqf Jun 21 '17 at 17:06
  • Note form 1040ES (for the in-progress year) can be downloaded from the Forms&Pubs tab on irs.gov and contains all the details – dave_thompson_085 Jun 21 '17 at 18:53
  • I'm saying yes, that safe-harbor will protect you from having to pay penalty if you have to write a check in April. – Michael Jun 22 '17 at 21:57
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In general, you are expected to pay all the money you owe in taxes by the end of the tax year, or you may have to pay a penalty. But you don't have to pay a penalty if:

  1. The amount you owe (i.e. total tax due minus what you paid in withholding and estimated taxes) is less than $1000.

  2. You paid at least 90% of your total tax bill.

  3. You paid at least 100% of last year's tax bill.

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

I think point #3 may work for you here. Suppose that last year your total tax liability was, say, $5,000. This year your tax on your regular income would be $5,500, but you have this additional capital gain that brings your total tax to $6,500. If your withholding was $5,000 -- the amount you owed last year -- than you'll owe the difference, $1,500, but you won't have to pay any penalties. If you normally get a refund every year, even a small one, then you should be fine.

I'd check the numbers to be sure, of course. If you normally have to pay something every April 15, or if your income and therefore your withholding went down this year for whatever reason, then you should make an estimated payment.

The IRS has a page explaining the rules in more detail: https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/estimated-tax/large-gains-lump-sum-distributions-etc/large-gains-lump-sum-distributions-etc

  • 1
    Another relevant line from the IRS: "If your 2016 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 2017 or 110% of the tax shown on your 2016 return to avoid an estimated tax penalty." irs.gov/publications/p17/ch04.html – R. Hamilton Jun 21 '17 at 18:51

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