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We sold some U.S. government Savings bonds in June of 2018 that had a gain in interest of double our yearly income. A one time sale. Now, I'm thinking that I will owe quite a bit in taxes and I'm concerned about how to avoid any penalties. I don't mind making an estimated tax payment, but I'm having trouble understanding exactly how to do it.

  1. Since it won't be a quarterly payment, can I just make the payment any time or does it have to be on specific dates? (I don't mind just doing it all at once and getting it over with.)

  2. Any tips on doing the calculation? I don't care if it's perfect or even if I over-pay some, but I just want to avoid the penalty.

I have no idea how big the penalty/interest might be. I know I could just wait and find out, but it may be a surprise that I wouldn't be happy about!

thx for any suggestions/help.

  • Dupe money.stackexchange.com/questions/95767/… and at least three more (I) linked there. PS: for Savings Bonds you could have elected to report and pay tax on the interest each year (with less or no risk of pushing into a higher bracket) instead of waiting and doing it all at maturity -- but that does you no good now. – dave_thompson_085 Aug 8 '18 at 18:57
  • Note that the rules for penalty for federal and state taxes might be different. The answers below seem to be about how to pay federal taxes to avoid the federal underpayment penalty, but you might have to do something different regarding paying state taxes to avoid the state underpayment penalty, depending on your state. – user102008 Aug 8 '18 at 20:20
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First lets assume that all the gains are taxable.

Lets also go with the fact that gains are double your normal income.

Then yes you need to be concerned about owing a large payment in April next year.

You have two options regarding avoiding a penalty:

  • Make a quarterly payment.
  • Make the safe harbor.

The safe harbor requires less knowledge of what your taxes will be next April. The idea is that if your withholding this year, and any tax payments (like quarterly payments) exceed your tax responsibility on the tax forms you submitted in April of this year, then you can avoid underpayment penalties.

From IRS pub 505

General Rule

In most cases, you must pay estimated tax for 2018 if both of the following apply.

  1. You expect to owe at least $1,000 in tax for 2018, after subtracting your withholding and refundable credits.

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

    a. 90% of the tax to be shown on your 2018 tax return, or

    b. 100% of the tax shown on your 2017 tax return. Your 2017 tax return must cover all 12 months.

Note. The percentages in (2a) or (2b) just listed may be different if you are a farmer, fisherman, or higher income taxpayer. See Special Rules , later.

...

Higher Income Taxpayers

If your AGI for 2017 was more than $150,000 ($75,000 if your filing status for 2018 is married filing a separate return), substitute 110% for 100% in (2b) under General Rule , later.

For 2017, AGI is the amount shown on Form 1040, line 37; Form 1040A, line 21; and Form 1040EZ, line 4.

So if you adjust your withholding for the rest of the year to make sure that you have 110% of the Total Tax on your previous years form. Calculate how much as been withheld so far, estimate how much will be withheld the rest of the year, and if you need to have additional money withheld submit a new W-4. Make very sure you make the safe harbor. If you do then you will avaoid a tax penalty.

Of course you still have to make sure you can pay what you owe in April of next year.

  • When you say "the tax shown on your 2017 tax return" do you mean line 63 on the Form 1040? – public wireless Jan 31 at 23:48
  • ?,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, – public wireless Feb 12 at 18:51
  • Search the linked document for the phrase "Total tax for 2017—line 12b" it is more complex than just one line. – mhoran_psprep Feb 12 at 21:53
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To avoid the IRS prepayment penalty, you have a choice: you can estimate your taxes with the method of your choice (i.e. commercial software or calculator and the forms) and pay 90% of the estimated taxes in advance, or you can pay 100% of your last year's tax (the IRS only requires "whichever is smaller" so you can do this for simplicity if you care to). You can pay the total in one payment if you like.

This link specifies this, and includes links to instructions (Pub 505) and the form that would calculate the penalty (Form 2210) so you can game it out.

Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen, certain household employers and certain higher income taxpayers. For more information, refer to Publication 505, Tax Withholding and Estimated Tax.

  • Does the timing matter? For example, if he sold the bonds January and made a Q4 estimated tax payment, would that avoid a penalty? Or would he need to make the estimated payment in Q1? – Jeff O'Neill Aug 8 '18 at 18:08
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    @JeffO'Neill: for income in Jan-Mar if you need estimated payments (not safe harbor or withholding) they must start with Q1 but can be spread out. For later 'quarters' (IRS is actually 3-2-3-4 months) since you can't go back in time to pay evenly you must pay that quarter AND fill out schedule AI. However, if you adjust withholding instead you only need to finish by the end of the year -- withholding is always treated as timely no matter when it was actually paid. See pub 505 and form 2210 as mentioned. – dave_thompson_085 Aug 8 '18 at 19:02

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