Tax on unexpected enormous year-end distribution

[bada bing]

I used a quote from you when I was really replying to the OP. The OP's situation seemed to indicate they had the option to withhold from payroll at least enough to meet the 100%/110% safe harbor. In that situation, my experience and opinion is to definitely avoid making an estimated tax payment.

I have had years where my income was 100% self employed, and in that case there is no option but to make estimated payments. IME it is best to avoid getting in the estimated tax filing "hopper" at the IRS if possible, because it definitely gets extra scrutiny. I have had a "day job" for 15 years now, which allows me to have withheld enough to meet safe harbor and avoid estimated filing requirements. I have sympathy from experience for those that are stuck with estimated filing.

 

[sergio]

I used a quote from you when I was really replying to the OP. The OP's situation seemed to indicate they had the option to withhold from payroll at least enough to meet the 100%/110% safe harbor. In that situation, my experience and opinion is to definitely avoid making an estimated tax payment.

I have had years where my income was 100% self employed, and in that case there is no option but to make estimated payments. IME it is best to avoid getting in the estimated tax filing "hopper" at the IRS if possible, because it definitely gets extra scrutiny. I have had a "day job" for 15 years now, which allows me to have withheld enough to meet safe harbor and avoid estimated filing requirements. I have sympathy from experience for those that are stuck with estimated filing.

Typically I would always pay via withholding, no doubt about that. But our year end dividend is 5x higher than what it was last year. We were planning on using this money for an acquisition in 2019, but the whole thing fell through and so the other owners (and myself) decided to bonus ourselves with some of the cash we had earmarked. This was literally proposed a few days ago and will be signed off on early next week.

 

[OldShooter]

... What I was disputing was old shooters statement: ..

I'm not sure what your beef is. I said two things:

1) I pay the safe harbor amount.
2) It is an option for everyone.

So what's your dispute with those two factual statements?

Is paying the safe harbor amount a good option in 100% of cases? Probably not, since almost no solution hits 100%, but it is an easy option especially for those of us who do not want to screw around estimating taxes. And suppose I wildly overpay, say $10,000. I pay it in December and I file in February when the 1099s are in. I get it back a month later. At 2% annual interest, that overpayment costs me maybe $75 taxable income. Less than we spend for dinner most restaurant evenings. Am I willing to work as a fairly incompetent tax accountant in order to save $75 pretax? Probably not. YMMV, however.

 

[Gresh]

Had a situation early in my retirement (and last year of DW's career) where she got a chance to take a buyout just a few months before when she planned to retire. Suddenly her severance was a huge increase in income for the year (and they for whatever stupid reason did not take out withholding) and the tax amounts I was carefully sending in each quarter were not going to be enough.

Because a huge chunk of the income came in the 4th quarter we simply estimated what the taxes for the year were likely to be and made a 4th quarter estimated payment (due by Jan 15th of the next year). Filled out form 2210 (in TurboTax) to show the large increase in income was 4th quarter so we were not simply underpaying all year. No issues.

I also did this one year where I converted (IRA to Roth) more than I had anticipated, so estimated tax payments were under for that year as well. But the conversion was 4th quarter so as long as I paid by the Jan 15 estimated tax date no underpayment.

 

[sergio]

If I can pay only one of state or federal through withholdings on my last two paychecks for this dividend tax, what would you recommend? Seems like there could be lots of state to state variability, where as the federal 2210 / quarterly taxes are well documented online. My payroll withholding change is due tomorrow at 11am

 

[VungTau]

Similar situation every year

I get a lot of year end taxable cap gains that trigger some substantial tax hits and because it is all generated in Q4 and varies widely by year there is no way to plan my estimated tax payments. I pay the amount due for Q4 by Jan 15 and haven't had any issues with IRS so far. Been doing this for years.

 

[scrabbler1]

If I can pay only one of state or federal through withholdings on my last two paychecks for this dividend tax, what would you recommend? Seems like there could be lots of state to state variability, where as the federal 2210 / quarterly taxes are well documented online. My payroll withholding change is due tomorrow at 11am

Just to continue my story from back in 2008 when I got that large cash-out of company stock late in the year, I decided to pay nearly all of the added state income taxes in a 4th quarter estimated tax payment made before 12/31/2008 so I could deduct them on that year's federal return I filed the following April. This is how I had been doing things in prior years when the amounts involved were much smaller. The April 2009 state tax payment was fairly small (less than $100). I did have some AMT issues which limited some of the deductibility of state income taxes on my federal return. But if I had deducted those state income taxes paid on my 2009 federal return a year later, my total federal income tax liability would have been zero which was not much lower than it would have been anyway in my first full year of ER. There might have been a sweet spot in splitting up the state tax payments between 2008 and 2009, but I didn't bother trying to find it.

With the recent tax law change, being able to deduct state income taxes on your federal return might be limited or less relevant (if you can take the standard deduction instead). You would have to play some what-if games to figure out that answer.

And one more little story which you may find helpful. I help out a friend with his portfolio including income taxes and a small part of his income comes from a RMD from an inherited IRA. He doesn't need the RMD for his everyday expenses, so we use it as a chance to boost his withheld income taxes, diverting nearly all of it toward federal and state income taxes. Part of said inheritance included a large brokerage account which generates considerable investment income, most of it taxable to some degree.

When it comes time to allocate his RMD between federal and state taxes (something I will be doing for him very soon), I always make sure to figure out how much I want to allocate to the state side first, then whatever is left goes to federal. This way, he can maximize his state deductibility on his federal return (like I described earlier) and make sure he won't have to make any estimated income tax payments to the state. I figure if he has to make estimated tax payments, let's limit it to one instead of two, for simplicity.

 

[mrfeh]

Thanks scrabbler. So it's just as simple as sending the "shortage" to the IRS before mid Jan 2019?

Pretty much. It is scenarios such as yours where estimated taxes are the better option than withholding.

 

[cathy63]

If I can pay only one of state or federal through withholdings on my last two paychecks for this dividend tax, what would you recommend? Seems like there could be lots of state to state variability, where as the federal 2210 / quarterly taxes are well documented online. My payroll withholding change is due tomorrow at 11am

It's probably too late, but you should increase your state deductions enough to have $10K of withholding for the year. That's the max you can deduct on your Fed return now, so pay the rest that you owe in January in case it'll be deductible on next year's taxes.

If you are certain that your tax liability to the state will be much more than $10K both this year and next year, then it doesn't really matter and you might as well send the whole paycheck to the state this year.

 

[OldShooter]

If I can pay only one of state or federal through withholdings on my last two paychecks for this dividend tax, what would you recommend? Seems like there could be lots of state to state variability, where as the federal 2210 / quarterly taxes are well documented online. My payroll withholding change is due tomorrow at 11am

Unless your 2018 earnings are going to be far less than 2017, just pay he safe harbor amount of 100% or 110% of 2017 tax. These are the federal numbers; you state may have different numbers but I'd be very surprised if they don't have a safe harbor option.

Really, no need to do any calculating to project 2018 taxes.