House sale capital gains and taxes

[statsman]

There is the possibility that our house will be sold before the end of 2018. We will have a large capital gains on the sale, well beyond the $500K exemption.

Because our tax bill for 2018 wasn't expected to be large, we were able to have tax withholding on my wife's SS, my pension, and a small inherited IRA meet our obligations rather than pay estimated taxes.

How do we deal with such a large (and unplanned) tax bill? Have tax withholding on the sale of the house (allowed?)? Hope to be able to pay estimated taxes by Dec 17 even though we didn't make any other estimated tax payments in 2018?

[RobbieB]

As long as you withheld all you owed last you will have no penalty.

Just pay the tax with the proceeds.

[Souschef]

Quote:

Originally Posted by statsman Hope to be able to pay estimated taxes by Dec 17 even though we didn't make any other estimated tax payments in 2018?

If I am not mistaken, The 4th installment is due mid January. I think the theory is not to cut into your Xmas spending

[kaneohe]

Quote:

Originally Posted by RobbieB As long as you withheld all you owed last you will have no penalty. Just pay the tax with the proceeds.

RobbieB is correct.......safe harbor is 100% of last yr tax....what you paid for the whole yr.......(or 110% if your AGI last yr was > 150K)
If you can withhold that amount , it will be much simpler than paying est.taxes.

[audreyh1]

Quote:

Originally Posted by statsman There is the possibility that our house will be sold before the end of 2018. We will have a large capital gains on the sale, well beyond the $500K exemption. Because our tax bill for 2018 wasn't expected to be large, we were able to have tax withholding on my wife's SS, my pension, and a small inherited IRA meet our obligations rather than pay estimated taxes. How do we deal with such a large (and unplanned) tax bill? Have tax withholding on the sale of the house (allowed?)? Hope to be able to pay estimated taxes by Dec 17 even though we didn't make any other estimated tax payments in 2018?

Don't worry about it as long as you have paid 100% (110% if AGI >$150K last year) of the prior year's taxes in estimated taxes. You get a pass for a sudden jump in annual income.

You don't have to withhold on the house sale. You can pay the balance on April 15 of 2019.

[pb4uski]

Quote:

Originally Posted by statsman .... How do we deal with such a large (and unplanned) tax bill? Have tax withholding on the sale of the house (allowed?)? Hope to be able to pay estimated taxes by Dec 17 even though we didn't make any other estimated tax payments in 2018?

If you don't owe any taxes based on your income through 8/31/18 you can use the annualized income installment method. Essentially, your estimated taxes due are based on your annualized income as of 3/31, 5/31. 8/31 and 12/31... if your income through those dates, annualized, is less than your deductions for then you don't owe any tax.

Alternatively, if you are over 59 1/2 you can do a tIRA withdrawal in December and have it 100% withheld... it will be treated as it paid throughout the year.

[RunningBum]

I don't know if you can do withholding on the sale of a house. If you can, that's the best way. If not, making an estimated payment is quite simple as well. I don't know why people think it isn't.

The one complexity is that the IRS may want an explanation of why you made a huge late payment. If you qualify for safe harbor you are probably fine. Otherwise you just fill out form 2210 and show the timing of your income, deductions, and payments for each quarter, and the form calculates if you have any late payment penalties. They really aren't that bad. I guess you could do the 100% withholding on a tIRA withdrawal but on a high income year that may be less tax efficient than taking a penalty, which I doubt you'll have anyway unless you've been underpaying the rest of your income.

[audreyh1]

Quote:

Originally Posted by RunningBum The one complexity is that the IRS may want an explanation of why you made a huge late payment. If you qualify for safe harbor you are probably fine. Otherwise you just fill out form 2210 and show the timing of your income, deductions, and payments for each quarter, and the form calculates if you have any late payment penalties.

No the IRS will not want an explanation of a huge late payment. I have done it several times. If the prior years taxes (or 110% of them) have been paid timely with 4 quarterly installments or have been withheld during the year, the full form 2210 isn’t necessary either. It’s only needed to prove that with current year annualized income taxes were paid on time, so it would be the fall back if the 2017-based safe harbor rule hadn’t been met.

I am using the annualized income method this year with my biggest payment in Jan, so I will be filing form 2210 for 2018 taxes.

But in 2017 I used the 110% of 2016 taxes paid in four equal installments for estimated taxes, and then paid the large remaining sum on April 15.

Reason? 2017 income was much higher than 2016 or 2018 because I realized a large capital gain in 2017. So safe harbor let me pay lower estimated taxes in 2017 based on my 2016 taxes, but this year I switched to annualized income method to avoid way overpaying estimated taxes since my 2017 taxes were high.

[RunningBum]

Quote:

Originally Posted by audreyh1 No the IRS will not want an explanation of a huge late payment. I have done it several times. If the prior years taxes (or 110% of them) have been paid timely with 4 quarterly installments or have been withheld during the year, the full form 2210 isn’t necessary either. It’s only needed to prove that with current year annualized income taxes were paid on time, so it would be the fall back if the 2017-based safe harbor rule hadn’t been met. I am using the annualized income method this year with my biggest payment in Jan, so I will be filing form 2210 for 2018 taxes. But in 2017 I used the 110% of 2016 taxes paid in four equal installments for estimated taxes, and then paid the large remaining sum on April 15. Reason? 2017 income was much higher than 2016 or 2018 because I realized a large capital gain in 2017. So safe harbor let me pay lower estimated taxes in 2017 based on my 2016 taxes, but this year I switched to annualized income method to avoid way overpaying estimated taxes since my 2017 taxes were high.

I have had to fill out form 2210 for a situation like this, so yes, form 2210 ("the explanation") may be required. As I said, if you have safe harbor, you are probably ok (2210 not needed). OP does not know if the house will sell this year, and we've passed 3 quarterly payments now, so it's not possible to make 4 equal payments for 2018. If they had not planned to hit safe harbor, it may not be easy to reach it now.

[statsman]

Our 2017 taxes were covered by the withholding on my wife's paychecks before she retired in the summer. We ended up with a refund for the year. I had planned for covering taxes in 2018 by withholding on my modest pension and the RMD on a small inherited IRA taken in December, as our yearly tax bill wouldn't be a lot. But any house sale will trump that.

As it is, my wife and I have never paid estimated taxes during our 34 year marriage.

[RunningBum]

The 2017 refund has no bearing. What does matter is your total tax (1040 line 63) for 2017, and whether you'll withhold 100% (110% for high income) of that in 2018.

Since your wife worked part of 2017, you may not have planned for this. If you can increase your withholding for the rest of the year to meet 100% of 2017, you're fine.

Otherwise, make an estimated payment before Jan 15 if you sell your house this year, and deal with the forms and any (probably small) penalty for underpayment. You may still be ok because the withholding is treated differently than estimated payments as far as the timing goes.

Estimated payments are easy. Go to https://www.eftps.gov/eftps/ . I would enroll now in case you have to do it, so that you're set if you need it. If you don't need it, don't use it. My state has a similar system, just as easy to use.

[statsman]

Quote:

Originally Posted by RunningBum The 2017 refund has no bearing. What does matter is your total tax (1040 line 63) for 2017, and whether you'll withhold 100% (110% for high income) of that in 2018. Since your wife worked part of 2017, you may not have planned for this. If you can increase your withholding for the rest of the year to meet 100% of 2017, you're fine.

It appears a modest withholding on the inherited IRA's RMD we usually take in December will get us to 100% of 1040 line 63 for 2017, assuming I leave the pension alone. If California has a similar rule, we've already exceeded the tax bill for 2017.

[RunningBum]

Quote:

Originally Posted by statsman It appears a modest withholding on the inherited IRA's RMD we usually take in December will get us to 100% of 1040 line 63 for 2017, assuming I leave the pension alone. If California has a similar rule, we've already exceeded the tax bill for 2017.

Then you're all set! You'll just have to make a payment come tax time for the excess taxes due from the sale.

For 2019 (assuming you do sell in 2018 and your 2019 taxable income is much less than 2018), you won't want to try to hit this safe harbor by withholding 100% of line 63 for 2018. Instead just try to make sure you withhold enough to cover taxes, erring on the side of getting a refund.

[statsman]

Quote:

Originally Posted by RunningBum Then you're all set! You'll just have to make a payment come tax time for the excess taxes due from the sale. For 2019 (assuming you do sell in 2018 and your 2019 taxable income is much less than 2018), you won't want to try to hit this safe harbor by withholding 100% of line 63 for 2018. Instead just try to make sure you withhold enough to cover taxes, erring on the side of getting a refund.

The house sale is a one-time income bump for us. Assuming a house sale in 2018, I expect our 2019 taxable income to be less than in 2018 (a lot less!). But there is a good chance our taxable income outside of the house sale will rise in 2019 as we will have additional cash to invest. I will plan accordingly for withholding in 2019 under these circumstances. Thank you.

[statsman]

We have a pending sale on our house, and the expected close will occur late in October. According to our escrow representative, we can have tax withholding for the state of California accomplished in escrow. It is an unusual request, one they don't see too often from someone selling their primary residence. But given the sizeable capital gains we will have on our house, we are going to request it be done. As we are leaving California, I'd rather not have to deal with the state tax-wise more than we need to.


Federal tax withholding, OTOH, isn't available to us. As such, I will need to review the posts about estimated taxes for federal.

[statsman]

Quote:

Originally Posted by statsman We have a pending sale on our house, and the expected close will occur late in October. According to our escrow representative, we can have tax withholding for the state of California accomplished in escrow. It is an unusual request, one they don't see too often from someone selling their primary residence. But given the sizeable capital gains we will have on our house, we are going to request it be done. As we are leaving California, I'd rather not have to deal with the state tax-wise more than we need to. Federal tax withholding, OTOH, isn't available to us. As such, I will need to review the posts about estimated taxes for federal.

I need to clarify the above. For California, your choices for withholding are either 3 1/3% of the sales price or 12.3% of the gain. The former is not enough (needs to be 5%) and the latter too much (needs to be 10%).

I'm guessing estimated taxes or safe harbor for both federal and California?

[statsman]

The sale of our house closed this week, so we'll need to deal with the taxes owed due to the capital gains for 2018 (beyond the $500K exemption and improvements on the house).

Last year, we had sizeable (for us) tax refunds due to one-time large medical expenses that were deductible. I applied a portion of those tax refunds (federal and California) to this year's taxes when I filed for the 2017 tax year. Are those forwarded amounts considered part of the taxes paid/owed for safe harbor?

[audreyh1]

Quote:

Originally Posted by statsman Last year, we had sizeable (for us) tax refunds due to one-time large medical expenses that were deductible. I applied a portion of those tax refunds (federal and California) to this year's taxes when I filed for the 2017 tax year. Are those forwarded amounts considered part of the taxes paid/owed for safe harbor?

Yes, absolutely! (At least for Federal - don't know California rules).

[statsman]

Quote:

Originally Posted by audreyh1 Yes, absolutely! (At least for Federal - don't know California rules).

With California, there appears to be a slight deviation with safe harbor. If the AGI of the current year happens to be $1M+, then you are required to pay 90% of the current year's taxes.

So, if you sell a house in a high cost area of California you have lived in for decades, this one could bite you in the rear.

https://www.ftb.ca.gov/individuals/faq/ivr/208.shtml

[statsman]

While TurboTax does not have its forms finalized for the 2018 tax year (waiting on the IRS), based on the information I was able to input we do not have any penalties for the very large capital gains on the sale of our house. And yes, the $500K exemption was accounted for (not sure how many times I need to repeat that).

Thanks to everyone who provided advice about the safe harbor rules.