Stuff happens, eh? An unanticipated LT capital gains from a real estate transaction (land, not a primary residence) will take place in 2022. We're familiar and comfortable with processing the 2022 taxes at a federal and state level; for cost basis calculations and related. However, the dollar value will be significantly higher than normal and will have an impact upon our "taxes due"for 2022, versus a "normal" tax year. We do understand that line entry items for "traditional" taxable income, versus "LT capital gains" will have different impact(s) on the taxes owed; but will show up in the final math for taxes. A consideration is doing a "test" filing account in our 2021 tax program to obtain an idea of the Fed. tax burden.
We've begun to sniff around the internet for clues of the best path forward to avoid "underpayment/penalties". The IRS site offers information regarding doing calculations (what if scenarios) as to paying taxes before filing time via the 1040-ES. Numerous other online sites offer pieces of information as to a proper plan to avoid underpayment/penalties. A fairly common suggestion is to pay "110%" of ones prior year Fed. taxes now. We read these as a "good faith" gesture towards the IRS, that we know we'll need to pay more in taxes for 2022, but we're not yet sure of how much more. The "gesture" being a way to avoid an underpayment penalty.
Gross taxable income basis for the household arrives "only" from pensions, RMDs and SS. All other investment distributions are in IRAs; therefore, no taxable cap. gains are ever a part of our tax schedules. 2022 will be an non-normal tax filing year.
So, continuing to "sniff" around for a best path forward; which may likely contain paying estimated taxes before year end, for the full 2022 tax year.
Suggestions welcomed as to the best path forward, from your knowledge/experience.
Thank you.
Remain curious,
Catch
Comments
I have read about the payment methods.
Then you are suggesting that an estimated tax be paid now, eh?
Your summary is in line with our understanding, too. Although not of consequence; one may pay estimated taxes at any time; not having to follow quarterly ending dates, to the best of our understanding. But, your note about Jan. 15th, 2023 is important, too; as we will fully know the tax impact at that time.
If you take RMDs, you can pay all of your estimates taxes at the end of the year and have it count for entire year without penalty. Ask your brokerage to send the amount you determine is due to the IRS as a tax payment. Just make sure you file for the withdrawal with enough time for them to process it before 12/31/2022
This also reduces the value of your IRA, making next years RMD lower.
As Yogi wrote, withholdings are usually considered evenly applied. But if it advantageous to do so (e.g. if your withholdings are front loaded), "you may choose to include your withholding according to the actual dates on which the amounts will be withheld." Pub 505, instructions for Worksheet 2-7, line 31.
However you choose to allocate withholdings, so long as you've paid in (estimates plus withholdings) of at least 1/4 of the total as of the first estimate deadline, 1/2 as of the 2nd estimate deadline, and 3/4 as of the third, the IRS doesn't care if these payments are even or not. However, if you back load the payments, the IRS does care. Unless your income was correspondingly back loaded.
If your income was, say $15K in the first quarter, $15K in the second quarter, $15K in the third quarter, and (due to YE divs and cap gains) $45K in the last quarter, the IRS will allow you to pay in roughly half of your taxes in the last quarter.
See Form 2210 for how the underpayment penalty is calculated, quarter by quarter. It has a Schedule AI (annualized income) where you can document how much income you received in each quarter. Based on those amounts, it adjusts how much you should have paid each quarter.
This is not the easiest form to fill out and requires fairly detailed bookkeeping (e.g. how much interest did your bank pay you in April and May?). Like Ben, I am not a professional, but I have tried this at home more than a couple of times. I found it something to avoid unless one's income is very uneven.
Still, it provides an escape in case you wind up with a lot of unexpected income in a quarter.
What we've done over the years is to not withhold much tax from the monthly pension payments, knowing we will underpay for the year; but when pulling the RMD's for the IRA's in December, we withhold extra tax for these distributions. This maintains our tax obligation amount for the year; and we have a bit of extra money monthly from the pensions. Fidelity makes it easy to set how much Fed. and state tax to pull for the RMD distributions.
Thanks @msf
I'll look at your links, as I already have a few saved from the IRS site for further study. I'm going to peek inside last years tax program, too; for any guidance there. As this capital gains event will take place during the 3rd quarter, we don't have flex via earlier calendar periods to pay estimated taxes then. As we are retired, we don't have a method to withhold more taxes from employment income, for an offset.
Similarly, if one pays unequal amounts during the 4 quarters and the inequality consists of paying *more* than what was expected, I think it likely that the IRS will not complain. That said, their computers may complain. I know a bookkeeper at a law firm who received a notice from the IRS that a heavy fine was about to be imposed because the firm had OVERPAID their taxes. And the amount of discrepancy was less than a dollar. A phone call to a reasonable person at the IRS solved the dilemma in less than a minute.
Bonsoir,
Catch
Take care,
Catch
Subtitle E: Miscellaneous Provisions - Repeals income averaging.
https://www.congress.gov/bill/99th-congress/house-bill/3838
https://www.rbcwm-usa.com/resources/file-687802.pdf
Take care,
Catch
I know about the use of 1031's; but this transaction is not flipping land into another similar investment.
Regards,
Catch
That's a little messy. A way to effect something similar is to make the transaction a seller-financed sale and collect installment payments. I would have thought that such a sale would be treated as two separate transactions - a competed sale now, and a mortgage where you are the lender.
But Congress (IRC § 453) long ago decided that for installment sales, capital gains would not be recognized until payments were made. Since the payments are made over several years, this becomes another way to spread the recognized capital gains over time.
IRS Topic 705 - Installment Sales
Form 6252 - Installment Sale Income
Pub 537 - Installment Sales