Hypothetical 1040-ES question

[rmcelwee]

In a few days I'll be doing a 1040-ES for the first time in my life. I've researched it a bit but still getting confused on a few things. So, two questions (one hypothetical and one real life). Actually, they are kind of the same but here we go...

1) Let's say the standard deduction for 2024 is $29,200. I make $29,200 taxable income on the very first day of the year and never make another dime for the next 364 days. Do I need to worry about filing quarterly on that $29,200 (knowing that I won't owe a dime and will get 100% of it back)? Just using that example so I can wrap my head around how it really works>

2) Real situation. I sold some stock on 12/26/23 for a long term gains of $253,000. I will owe around $26,000 on April 15th. How much should I pay now on my quarterly taxes? The $26K I think I will owe OR some % of that $253K. I know they withhold 20% FED when I get money from my 401K. Should I just do the same here (~$50K)?

 

[CardsFan]

I am no tax pro, but if you have been paying quarterlies, I would make sure the last one brings you to 110% of the previous year's taxes (2022). That should give you safe harbor. Then you will pay the rest with your return

 

[rmcelwee]

I am no tax pro, but if you have been paying quarterlies, I would make sure the last one brings you to 110% of the previous year's taxes (2022). That should give you safe harbor. Then you will pay the rest with your return

I believe our income is going to fluctuate wildly for the next two or three years so the 110% thing won't always work for us. I'm pretty sure you are correct about it working for 2023. Thanks!

 

[audreyh1]

The taxes you owe are after the standard deduction unless you are itemizing. If you do this quarterly you need to learn the annualized income method. That method takes all the income YTD, annualizes it, and then computes a sort-of pro-rated tax.

First quarter Jan thru Mar, you multiply your income by 4, compute the tax on that, then pay 25% of what you owe so far.

Second quarter Jan thru May, you multiply your income by 2.5, compute the tax on that, and pay 45% of what you owe taking into account your first estimated tax payment.

And so on.

Then you file form 2210 with your final taxes showing which quarter the income occurred and the estimated tax you paid.

 

[CardsFan]

I believe our income is going to fluctuate wildly for the next two or three years so the 110% thing won't always work for us. I'm pretty sure you are correct about it working for 2023. Thanks!

Our income has fluctuated as well. In 2023 I took a large capital gain, so I did not do a Roth conversion (The effective tax rate on the conversion would have been over 25%). Since I knew my taxes would be much lower, I made a fair guesstimate in early in the year and just made sure I paid more than I thought was due.

This year, I will just make sure I pay 110% of 2023, and pay a big tax bill in April 2025.

 

[Sunset]

I believe our income is going to fluctuate wildly for the next two or three years so the 110% thing won't always work for us. I'm pretty sure you are correct about it working for 2023. Thanks!

If you pay 110% of the previous year tax spread evenly over the 4 installments of estimated taxes, it will work to put you in the safe harbor every time.

We pay 110% in taxes every year, as one year I tried to be clever and pay the taxes that would be due, and we got a surprise "gift" of declared dividends at the end of the year from a fund, and got fined by Fed and State.

The 110% includes any taxes you pay with income (pension or IRA withdrawal) plus your estimated tax payments.

 

[Jerry1]

In a few days I'll be doing a 1040-ES for the first time in my life. I've researched it a bit but still getting confused on a few things. So, two questions (one hypothetical and one real life). Actually, they are kind of the same but here we go...

1) Let's say the standard deduction for 2024 is $29,200. I make $29,200 taxable income on the very first day of the year and never make another dime for the next 364 days. Do I need to worry about filing quarterly on that $29,200 (knowing that I won't owe a dime and will get 100% of it back)? Just using that example so I can wrap my head around how it really works>

In that hypothetical situation, you would not need to make an estimated payment. Your taxable income would be zero so you’d pay no taxes and there would be no penalty or interest.

2) Real situation. I sold some stock on 12/26/23 for a long term gains of $253,000. I will owe around $26,000 on April 15th. How much should I pay now on my quarterly taxes? The $26K I think I will owe OR some % of that $253K. I know they withhold 20% FED when I get money from my 401K. Should I just do the same here (~$50K)?

Without knowing anything other than what you said, you could pay the $26,000. That assumes that the rest of your income is covered by your withholdings throughout the year. Note that when you file your taxes you may need to annualized your income so that you match your income (the gain) with the timing of your payment.

See above for answers to your specific answers.

What I would personally do is understand the hold harmless provision, which in your case would be 110% of last years (2022) tax liability. If your withholdings haven’t covered that, then you should pay in whatever it takes to ensure that any shortfall is paid in on the 4th quarter payment (January 16 due to the Federal holiday).