Another Estimated Tax question in FIRE

[BBQ-Nut]

Yet another question regarding estimated tax payments.

For my situation, I will be in FIRE, but my DW will still be working.

She will have her usual withholdings from her paychecks for State and Federal Taxes.

I will be eligible to draw a Pension, and I am thinking that I will set that up to have regular monthly withholdings for State and Federal taxes as well.

To make up the difference in estimated taxes, I plan on selling off some after tax assets in the beginning of the year.

I have read that the IRS expects taxes to be paid when the income is received, so....if I am doing estimated tax payments on the proceeds of the after tax sell off, do I pay the full estimated tax payment the first quarter only?

Assuming I have no other transactions, are my other quarterly estimated tax payments zero?

Or, can I truly 'pro-rate' the taxes of my beginning of the year sell off and spread them across the 4 quarterly estimated tax payments?

 

[kaneohe]

It might be simpler to increase withholding so that you end up in the safe harbor of withholding 90% of the current years taxes (or 100% of last yrs taxes.....or 110% if AGI > 150K). That way you might also make an extra penny or so in interest by paying throughout the yr instead of in Q1. You can request employer withhold an extra X$ per pay period.

 

[BBQ-Nut]

It might be simpler to increase withholding so that you end up in the safe harbor of withholding 90% of the current years taxes (or 100% of last yrs taxes.....or 110% if AGI > 150K). That way you might also make an extra penny or so in interest by paying throughout the yr instead of in Q1. You can request employer withhold an extra X$ per pay period.

That brings up an interesting point.

For those that go into the first year of FIRE - income streams change dramatically.

My income is....pretty darn good - but the resulting withholdings and our taxes for 2013 were high.

So for that first year of FIRE, if I used a "Safe Harbor" approach, I have a feeling that I'd be giving Uncle Sam a free loan and over paying in taxes.

After we have settled into a spending pattern *after* FIRE, I could see using the Safe Harbor approach.

 

[RunningBum]

You can always do equal quarterly payments, as long as you pay at least 90% of what you owe, or 100% (110% for high income people) of last year's taxes. If you have your income early, this is a good way to do it.

A danger is if you decide late in the year to sell more assets and have more gain. If you now won't have withheld enough, making too low of quarterly payments early might bite you. You can't make it up with a higher one in Q4.

However, in your case, you could likely have more withheld from your pension or your wife's paycheck since withholding isn't subject to the same rules that estimated payments are.

Somebody recently just posted a link to using withholding to manage your estimated tax payments in one of the other threads on estimated taxes. I'm almost certain it was earlier this month.

You could also use your tax program to run some scenarios, filling in a sample 2210 form to see how it all works out in different situations that apply to you.

 

[kaneohe]

That brings up an interesting point.

For those that go into the first year of FIRE - income streams change dramatically.

My income is....pretty darn good - but the resulting withholdings and our taxes for 2013 were high.

So for that first year of FIRE, if I used a "Safe Harbor" approach, I have a feeling that I'd be giving Uncle Sam a free loan and over paying in taxes.

After we have settled into a spending pattern *after* FIRE, I could see using the Safe Harbor approach.

For your case, instead of 100%of last yr, you would use 90% of this years
taxes (the lower income year). How Much to Pay
A bit of guesstimating would be involved and you might have to do a tweak late in the year to be sure you were on track.