First Year of Fire: decumulation stage

[BBQ-Nut]

So, this will be my first year of FIRE, DW is in the final throes of OMY (I hope 2015 is the last for her, work in progress) - and this will be the first year of decumulation.

Our AGI will be lower since I won't have earned income and while I get a pension, it will be modest compared to my usual paycheck.

My plan was therefore to make a sale of after tax assets to fund the majority of my expenses in 2015 - I'm not in a big hurry as I have 6 months worth of savings for my portion of our expenses.

My question is regarding LTCGs on the sale of after tax assets.

By my estimates, a small portion of my estimated sale will be in the 15% bracket.

Am I required to make an estimated quarterly tax payment for the total gains in the quarter I realize them, or can the total estimated tax be spread out over 2015?

[pb4uski]

Quote:

Originally Posted by BBQ-Nut ....Am I required to make an estimated quarterly tax payment for the total gains in the quarter I realize them, or can the total estimated tax be spread out over 2015?

You can do either. If you do the former you may need to file a Form 2210 to demonstrate that you made estimated tax payments commensurate with your incurred taxes. The 2210 basically analyzes your taxable income and taxes by estimated tax quarters (which differ slightly from calendar quarters). It is a PITA but I usually do it anyway because our income is loaded in the 4th quarter.

If you just estimate the total for the year and pay it over 2015 you can likely avoid the 2210.

[2B]

You really need to guess what your total tax bill will be for the whole year. You can't apply all of your deductions and exemptions to your first batch of income. To avoid penalties, you are safer overpaying in the early quarters and making adjustments later in the year.

In 2015 I'll have a tax bill much higher than 2014. My big slug of income will hopefully come in the first quarter this year with the SERP payment. I'll then write a check for 110% of my 2014 tax bill which gets me out of the penalty zone. I'll use the next 3 quarters to get closer to my actual taxes due.

[GrayHare]

Quote:

Originally Posted by BBQ-Nut My question is regarding LTCGs on the sale of after tax assets.

What are your "after tax assets"? Many people use that phrase to reference their Roth IRA/401k. Prior to withdrawal, no taxes are due on sales of assets inside an IRA or 401k.

[pb4uski]

after-tax assets = taxable accounts?

[38Chevy454]

I am not in this situation yet, but could you just have the taxes withheld out of the distribution? Figure out your tax rate, and then have slightly less than that taken out.

[kimcdougc]

We will be doing an NUA (Net Unrealized Appreciation) in February when DH retires. We will be having taxes taken out at the time we use the NUA therefore not having to pay quarterly taxes.

[Gotadimple]

Quote:

Originally Posted by BBQ-Nut My plan was therefore to make a sale of after tax assets to fund the majority of my expenses in 2015 - I'm not in a big hurry as I have 6 months worth of savings for my portion of our expenses. My question is regarding LTCGs on the sale of after tax assets. By my estimates, a small portion of my estimated sale will be in the 15% bracket. Am I required to make an estimated quarterly tax payment for the total gains in the quarter I realize them, or can the total estimated tax be spread out over 2015?

The key here is whether the tax owed in the period you realize the LTCG is covered by the taxes paid through tax withholding. The IRS expects payment on a pay as you go basis, according to my reading of instructions on for 2210, so you would need to have taxes withheld from the distribution of the sale to avoid a tax penalty. From Instructions of form 2210:

"In general, you may owe the penalty for 2014 if the total of your withholding and timely estimated tax payments did not equal at least the smaller of:
1.
90% of your 2014 tax, or
2.
100% of your 2013 tax. (Your 2013 tax return must cover a 12-month period.) "

Note the phrase "timely estimated tax payments." So, unless the sale you planned is in the fourth quarter, you may need to make an estimated payment in the third quarter to avoid a penalty. Penalties are not large, but they are a PIA. The good news is that if you use a tax preparation program like Turbo Tax or Tax Act, you can model your income and estimated taxes over a yearly period to avoid a tax penalty.

I make an larger estimated payment in April (to cover first quarter withdrawals), and a larger estimated payment in January (for the latter part of the year) to cover capital gain distributions.

-- Rita

[2B]

Quote:

Originally Posted by Gotadimple "In general, you may owe the penalty for 2014 if the total of your withholding and timely estimated tax payments did not equal at least the smaller of: 1. 90% of your 2014 tax, or 2. 100% of your 2013 tax. (Your 2013 tax return must cover a 12-month period.) "

If you make over $150k/yr your item 2 goes up. This is from Form 1040-ES.



Higher income taxpayers. If your adjusted gross income (AGI) for 2013 was more than $150,000 ($75,000 if your filing status for 2014 is married filing separately), substitute 110% for 100% in (2b) under General Rule, earlier. This rule does not apply to farmers or fishermen.

[pb4uski]

Quote:

Originally Posted by Gotadimple The key here is whether the tax owed in the period you realize the LTCG is covered by the taxes paid through tax withholding. The IRS expects payment on a pay as you go basis, according to my reading of instructions on for 2210, so you would need to have taxes withheld from the distribution of the sale to avoid a tax penalty.....

I don't think it needs to be withheld, it just needs to be paid. As long as your YTD withholdings and estimated payments as of the estimated payment due date exceed your YTD tax liability at the end of the quarterly estimated payment period you are all set.

For example, I typically have no tax obligation until the last quarter of the year when I rebalance and do my Roth conversion and I make no estimated payments until the January 15th estimated payment. The Form 2210 clearly shows that for each quarter other than the last quarter there would be no taxes due and I have never been questioned on it.

[LOL!]

A couple of things:

1. Simply have your spouse adjust their withholdings to cover the income taxes that your family will have. This is better than estimated payments since they are assumed to have been paid equally throughout the year. Just tell your spouse "That's what you get for OMY syndrome." It might even be possible to have all the taxes taken out of the December paychecks, but watch out in case spouse leaves work before that happens.

2. Penalties are puny, so I would not worry about them, but there are several "safe harbors" that one can achieve so that no penalties need to be paid.

3. Kiplinger had this to say:The Most Overlooked Tax Deductions-Kiplinger go to slide 22 (Waiver of penalty for newly retired).

So estimated taxes are really for the quarter you had the income, but taxes withheld from paychecks are really assumed to be spread out over the year even if they are all withheld in a single quarter.

[audreyh1]

Quote:

Originally Posted by pb4uski I don't think it needs to be withheld, it just needs to be paid. As long as your YTD withholdings and estimated payments as of the estimated payment due date exceed your YTD tax liability at the end of the quarterly estimated payment period you are all set. For example, I typically have no tax obligation until the last quarter of the year when I rebalance and do my Roth conversion and I make no estimated payments until the January 15th estimated payment. The Form 2210 clearly shows that for each quarter other than the last quarter there would be no taxes due and I have never been questioned on it.

Yep, that works.

[meierlde]

Note that for 2014 the underpayment penalty if you pay no estimated tax is 1.995% (or make the same estimated payment all 4 times). The daily rate is .08%. So the long method takes that value times the number of days the since the payment should have been done.
As noted the rate is low enough that for one year one should not obsess about it.

[Looking4Ward]

Quote:

Originally Posted by pb4uski I don't think it needs to be withheld, it just needs to be paid. As long as your YTD withholdings and estimated payments as of the estimated payment due date exceed your YTD tax liability at the end of the quarterly estimated payment period you are all set.

+1

To go even a step further, my W-2 income stopped last year as of 8/31. At that time, my withholding was entirely sufficient to cover the amount of income.

After 9/1, however, I incurred an additional $42K in dividends and capital gains distributions. But anything from 9/1 and beyond was considered 4th quarter for estimated tax payment purposes and due by 1/15 (for some reason the 4th quarter according to the IRS includes September) so this morning I initiated a draft for the $11.5K estimated tax (ouch).

[MBAustin]

Good advice already. Also remember that if you have mutual funds in your taxable accounts that have paid out LTCGs that you have reinvested, you have already paid the taxes and need to subtract that from your cost basis. We had a few of these accounts and I created monster spreadsheets to figure out the basis as the distributions were significant over the 10-20 year period involved. Wiped out a lot of the tax liability.

[audreyh1]

Quote:

Originally Posted by MBAustin Good advice already. Also remember that if you have mutual funds in your taxable accounts that have paid out LTCGs that you have reinvested, you have already paid the taxes and need to subtract that from your cost basis. We had a few of these accounts and I created monster spreadsheets to figure out the basis as the distributions were significant over the 10-20 year period involved. Wiped out a lot of the tax liability.

Hopefully your brokerage already has the accurate basis tracked for you.

[Looking4Ward]

Quote:

Originally Posted by MBAustin Good advice already. Also remember that if you have mutual funds in your taxable accounts that have paid out LTCGs that you have reinvested, you have already paid the taxes and need to subtract that from your cost basis. We had a few of these accounts and I created monster spreadsheets to figure out the basis as the distributions were significant over the 10-20 year period involved. Wiped out a lot of the tax liability.

Could you elaborate on that part for me? I was under the impression that with taxable accounts the taxes on capital gains distributions were owed regardless whether you took the distribution or reinvested it. How are the taxes already paid if the proceeds are reinvested?

EDIT: Nevermind. I understand now that you mean in the future when selling any portion of the asset to make sure the taxes that were paid on re-invested gains were accounted for in the basis.

[BBQ-Nut]

Sorry for the lag in follow up - FIRE is blocked at work - but that won't be an issue starting about 1pm tomorrow when I have my final day and exit interview!!!


Yes - After Tax = taxable accounts.


My DW will continue to have her Fed & State withholdings from her job income, and I plan on doing withholdings when my pension benefits begin later in March.


I have estimated the withholdings from these streams plus estimated taxes on the sale of my After Tax (taxable accounts) which will be LTCGs

Yes - I have the cost basis for those assets I plan to sell so that I know how much of the distribution will be a gain.


So, IF our other income streams already have classic withholdings, my original question was if I sell taxable assets in February 2015 and I estimate that tax owed on the LTC Gain is $1000, do I have to pay that $1000 all up front in the quarter they were realized, or can the $1000 due be 'pro-rated' over 4 estimated tax payments in 2015?

[audreyh1]

Quote:

Originally Posted by BBQ-Nut Sorry for the lag in follow up - FIRE is blocked at work - but that won't be an issue starting about 1pm tomorrow when I have my final day and exit interview!!! Yes - After Tax = taxable accounts. My DW will continue to have her Fed & State withholdings from her job income, and I plan on doing withholdings when my pension benefits begin later in March. I have estimated the withholdings from these streams plus estimated taxes on the sale of my After Tax (taxable accounts) which will be LTCGs Yes - I have the cost basis for those assets I plan to sell so that I know how much of the distribution will be a gain. So, IF our other income streams already have classic withholdings, my original question was if I sell taxable assets in February 2015 and I estimate that tax owed on the LTC Gain is $1000, do I have to pay that $1000 all up front in the quarter they were realized, or can the $1000 due be 'pro-rated' over 4 estimated tax payments in 2015?

You have to pay taxes on it up front in the quarter realized, as the estimated tax methods assume you'll realize the same gain each quarter. They multiply the fist quarter income by 4, and then you owe 25% of the tax YTD.