Large tax due next year, what to do with money?

[sergio]

This year I sold my share of a privately held company. Taxes will be very large for 2020, so I set my withholding so it will cover 100% of my 2019 tax (safe harbor) and estimate that I'll need to pay about $40,000 on my 2020 return.

Right now I have the $45,000 (I threw in a $5000 buffer to be safe) sitting in an Ally high-yield savings account. And my cash flow isn't fantastic.

Is there any other strategy I should be using? Should I just pay the entire capital gain as a one-time quarterly payment and then I can reduce my withholding to invest the extra cash that's now going towards the safe harbor? Should I just keep the $40,000 earning 1% interest? I don't want to invest the $40,000 in case the market crashes. Any other strategies I'm overlooking?

The common thinking seems to be "pay taxes as late as possible" but that means holding a ton of cash that earns nothing. If I pay off all these taxes, I can put additional free cash to work. But I feel like I'm missing something.

 

[RunningBum]

At some level of income, I think the safe harbor minimum is 110%, not 100%. See if that applies to you and make sure you have that covered.

I would keep with the withholding method to pay up to the safe harbor amount, since that's not subject to matching the timing of tax payments with the taxable income event. So you may shoot yourself in the foot (not badly) by paying off the whole capital gain now with a one-time payment.

I'd probably just keep the cash since there's no benefit to paying the full taxes early. You've got about 8 months before you have to file and pay the rest. At 1% that's about $300, isn't it? That's something, considering you make that by doing absolutely nothing more.

I don't quite follow your last statement:

The common thinking seems to be "pay taxes as late as possible" but that means holding a ton of cash that earns nothing. If I pay off all these taxes, I can put additional free cash to work.

You don't get additional free cash to work with by making a lump sum tax payment. You are counting your larger paycheck (because you no longer would have the extra withholding) as cash to work with, but aren't seeing that you are taking a lump sum of extra money from somewhere else, which is presumably invested and working for you. Right? You wouldn't just be making a $40,000 payoff, but also an additional amount equal to your extra withholding you've set up.

 

[cathy63]

At some level of income, I think the safe harbor minimum is 110%, not 100%. See if that applies to you and make sure you have that covered.

Yes, if you are in the range where you'll owe $40K in taxes, then you need to withhold 110% of your 2019 tax liability.

I agree that there's no advantage to paying the $40K early. Just hang onto it, even if it's not earning you very much right now.

 

[sergio]

Yes, if you are in the range where you'll owe $40K in taxes, then you need to withhold 110% of your 2019 tax liability.

I agree that there's no advantage to paying the $40K early. Just hang onto it, even if it's not earning you very much right now.

All of the safe harbor rules I've seen refer to paying 110% of 2019 tax if 2019 AGI is >$150k. My 2019 AGI was under $150K, so I believe I'm only required to pay 100% of my 2019 tax... Am I understanding this incorrectly? Thanks!

 

[RunningBum]

All of the safe harbor rules I've seen refer to paying 110% of 2019 tax if 2019 AGI is >$150k. My 2019 AGI was under $150K, so I believe I'm only required to pay 100% of my 2019 tax... Am I understanding this incorrectly? Thanks!

Looks like you are correct. I just assumed that it was based on having high income in the current year, but I'm finding it's based on your income last year.