Generalized LTCG Safe Harbor 110% Quarterly Estimates

[Route246]

This is a generalized question regarding quarterly estimates.

Suppose I will have $1M LTCG tax owed and I'm in the 35% bracket.

Is there an advantage to take and push gains out from 2024Q4 to 2025Q1 with respect to the 110% safe harbor rules and to defer payment until April 2026? Is there an opportunity to earn interest on the tax payment funds until the April 15 filing date? I'm willing to take the risk of pushing out one quarter. I just want to know if I can put those unpaid taxes into zero coupons or other treasury instrument.

 

[audreyh1]

Whichever year you choose you to take the large taxable gain you have until April 15 of the following year to pay the balance of the taxes owed.

The year you take the large cap gain, you can use the prior year taxes which were much lower and meet the 100% or 110% safe harbor rule in 4 quarterly payments and pay the much larger balance owed on April 15 of the filing year with no penalty. So in this scenario you can earn interest on the balance until April 15.

Then the following year - don’t use the 110% safe harbor rule for a situation that is supposedly a 1 off situation with extra large taxes owed one year. Instead carefully estimate your taxes owed for the new year and be sure to pay at least 90% of that in 4 equal installments. OR if you can’t predict your income well enough you are better of using the annualized income method for paying estimated taxes which pits taxes on income received in each tax quarter on a pro-rated basis. This method is complicated but avoids overpaying estimated taxes as well as avoiding penalty. You have to file Form 2210 with your taxes to show your income each quarter and estimated taxes paid.

 

[Route246]

Whichever year you choose you to take the large taxable gain you have until April 15 of the following year to pay the balance of the taxes owed.

The year you take the large cap gain, you can use the prior year taxes which were much lower and meet the 100% or 110% safe harbor rule in 4 quarterly payments and pay the much larger balance owed on April 15 of the filing year with no penalty. So in this scenario you can earn interest on the balance until April 15.

Then the following year - don’t use the 110% safe harbor rule for a situation that is supposedly a 1 off situation with extra large taxes owed one year. Instead carefully estimate your taxes owed for the new year and be sure to pay at least 90% of that in 4 equal installments. OR if you can’t predict your income well enough you are better of using the annualized income method for paying estimated taxes which pits taxes on income received in each tax quarter on a pro-rated basis. This method is complicated but avoids overpaying estimated taxes as well as avoiding penalty. You have to file Form 2210 with your taxes to show your income each quarter and estimated taxes paid.

Thank you very much for the response. I'm vetting my words here before I talk to my CPA as when I'm on the clock it costs real money and I really don't like fumbling around and wasting money like that. From what you say I guess it would be better to have that 800K (of 1M) sitting in 4% zero coupons until April of the next year instead of giving 25% of it every quarter to the IRS where it earns nothing.

In summary, I'm trying to do some portfolio rebalancing on an outsized 95/5 equity position. We are also contemplating rebalancing some into premium real estate here in NorCal (Los Altos, Atherton, Hillsborough, Saratoga, in that order, for those who know the area). We are quite content with where we live now but premium real estate in this area tends to be the last thing that drops when real estate decides to take a dump and moving up in class would be OK but not necessary.

For you folks in other parts of the country, real estate prices here are nuts and totally irrational. I hear people talking about buying acres of land in other parts of the country. Here in Los Altos or Saratoga a nice (2200 sq ft) home on 1/4 acre on the nicer side with the better school district starts at 4.5M but at this price you need remodeling and upgrades from 60's and 70's interiors and floor plans. 5M-plus if you want move-in ready on 1/4 acre which is considered a large lot here. Just look it up on Zillow or Redfin if you can't believe this. These are not mansions or estate homes, these are ranch style 3 or 4 BR homes, mostly with 2- or 3-car garages.

 

[audreyh1]

Yes, if you wait until Q1 of 2025 to sell and realize a very large capital gain you just need to pay estimated taxes of 110% of your 2024 taxes in 4 equal installments for 2025 to avoid penalty and you can leave the remainder of what you will owe on April 15 2026 in interest bearing investments until then.

 

[Route246]

Well, an offer was accepted on Christmas Day 2024 and we are set to close on a home on January 23, 2025. Needless to say, I started liquidating equity assets on January 3, 2025 and I am currently moving the proceeds into SUTXX now. I estimate LTCG to be $1.5M-$2M or so. I'm not sure what our taxes are in 2024 yet but we will certainly be able to take advantage of the 110% safe harbor rule. I plan to sell enough equities to cover closing escrow and 2025 estimated taxes and take my chances with the market until April 2026 to write those huge federal and state checks. I'll probably dollar cost average sales from equities into SUTXX until we have sufficient funds to pay the April 2026 tax bills.

With facelifting and remodeling we probably won't be able to move into the house for at least a year, depending on design, permitting and construction. I would have preferred to have bought a place a few months later from now but things lined up with this one, mainly location and lot size so we went in, slightly overpaid but it is well within our budget constraints and the wife is happy so it will all work out.

 

[FedRetired50]

... until April 2026 to write those huge federal and state checks.

But does safe harbor apply to any state? Reading through this thread I assumed it would only apply to federal.

 

[SecondCor521]

But does safe harbor apply to any state? Reading through this thread I assumed it would only apply to federal.

States have their own independent rules. My state requires no advance payments of any kind and you can pay whatever you owe on April 15th. OP should check with a California tax preparer to figure out what California's rules are (which I suspect are not anywhere near as lax as my state's).

@cathy63 lives in CA I think, and if so I bet she knows. She might know even if she doesn't live in CA.

 

[FedRetired50]

That's what I expected.

 

[cathy63]

States have their own independent rules. My state requires no advance payments of any kind and you can pay whatever you owe on April 15th. OP should check with a California tax preparer to figure out what California's rules are (which I suspect are not anywhere near as lax as my state's).

@cathy63 lives in CA I think, and if so I bet she knows. She might know even if she doesn't live in CA.

Yes, I live in CA. The safe harbor rules here are mostly the same as the Fed rules. The differences are:

• you are required to make estimated payments if you will owe more than $500 (it's $1000 for Fed).
• if your income will be over $1M, you have to use the 90% of current year safe harbor, you can't pay 100% (or 110%) of the prior year's tax and pay the rest when you file. For "normal" (i.e. not tech CEO) taxpayers, this mostly comes into effect when they sell a home they've owned for a long time.
• CA only requires 3 estimated payments: 30% on Apr 15, 40% on Jun 15, 30% on Jan 15.

 

[audreyh1]

My answers only applied to federal income taxes.