Quarterly taxes on taxable brokerage account

[StellarCascade]

I've maxed out my ability to contribute to my 401k, IRA, and HSA, and beginning to invest in my taxable account to work towards my FIRE goal.

I'm trying to figure out if I need to be paying quarterly taxes on my taxable brokerage account or not (to cover capital gains, dividends, and interest). From researching online it looks like if I expect to pay over 1,000 dollars in taxes from my taxable account I should be paying quarterly taxes on it. (Which I expect will be the case).

Alternatively it looks like I can go the route of not paying any quarterly taxes during the year, but then pay 90% of my taxes owed for the year in December (to do "safe harbor" estimated payment), and avoid any fees/interest on my taxes. (then pay the remainder owed in April)

Are these the general two options that most people go by? Is my understanding correct of how a "safe harbor" estimated payment works? It's hard to find information on the IRS website about a doing safe harbor estimated payment.

Is there any advantage to doing quarterlies? I feel like it would only be advantageous to wait until December to pay to allow that money to grow some throughout the year

 

[Montecfo]

I never did estimated tax payments when I was warning a salary. Just made sure my withholdings from salary met a safe harbor or were otherwise in sync with my expected tax liability.

Your strategy of paying late suggests you could have underpayment of estimated tax. Use withholding. It is assumed to occur ratably throughout the year. Thus you can adjust it late in the year and cover any deficiencies, if needed.

 

[CardsFan]

OP. I assume you are still working, since you contribute to a 401k. Why not simply up your withholding to cover the taxes? That is what we did for all of our work careers. After a few years we fine tuned it to the point that we were within +/-$2,000, and usually under +/-$1,000.

 

[Ian S]

The safe harbor amount as I understand it is 100% of the previous year's tax liability (or 110% of that amount if your income is high enough.) Also, 90% of current year's tax liability will work but that can be tricky to estimate accurately for many investors. That safe harbor amount can be achieved via withholding from your earnings at a job and/or quarterly estimated payments. If you wait to pay all the taxes until the end of the year, you will incur penalties and interest. The only way around the penalties and interest is to take a traditional IRA distribution with tax withholding at 100% of the distribution in December. The reason that works is that the taxes withheld from the distribution are generally assumed to have been withheld over the entire year.

 

[gauss]

Alternatively it looks like I can go the route of not paying any quarterly taxes during the year, but then pay 90% of my taxes owed for the year in December (to do "safe harbor" estimated payment), and avoid any fees/interest on my taxes. (then pay the remainder owed in April)

Are these the general two options that most people go by? Is my understanding correct of how a "safe harbor" estimated payment works? It's hard to find information on the IRS website about a doing safe harbor estimated payment.

No - You can't just wait until the end of the year and pay (via Estimated Payment(s)) the safe harbor amount that applies (90%-110%) of last year and be ok. In general the IRS wants the money to come in uniformly (quarterly) throughout the year.

You could send in the 90%-110% amount of last year for the first estimated payment and nothing for the next 3 quarters and be ok -- or you could have the money withheld via W-2 or 1099- withholding once at the end of the year. W-2 and 1099- withholding are assumed to come in uniformly throughout the year, even though in this case you can wait until the end of the year if you have a cooperating employer or brokerage acct.

There is currently another thread that is discussing this.

-gauss

 

[RunningBum]

Alternatively it looks like I can go the route of not paying any quarterly taxes during the year, but then pay 90% of my taxes owed for the year in December (to do "safe harbor" estimated payment), and avoid any fees/interest on my taxes. (then pay the remainder owed in April)

No, this is not an option. If you can do it via withholding you'd be fine since withholding is assumed to be done throughout the year even if you do it on Dec 31, but estimated taxes have to be paid quarterly or you may pay a fine + interest.

If you don't make even quarterly estimated payments, you will have to fill out form 2210 to show when income was realized and when payments were made. If those match up per quarter you will be fine but if your payments lag behind the income you'll pay extra.

 

[MarieIG]

While I was working, I raised my withholdings to cover additional earnings from my brokerage account.

 

[StellarCascade]

Yes I am still working. I didn't realize I can have my employer increase my witholding to cover other income. Going to look in to doing this. thanks!

 

[HI Bill]

Alternatively, you can make estimated payments directly to the IRS based on the anticipated taxes you'll owe for dividends and distributions. Since I tend to sell in large bunches, usually in the first half of the year, I simply make a payment in each quarter where I have large tax liabilities due to these transactions. I don't make uniform quarterly payments, as that's not how my income/tax liability is realized.