Increasing my W-4 withholdings Or make estimated tax payment in anticipation of capital gains

[S8NpTl]

I have plans to dispose of some stocks (RSUs) in the calendar year that will anticipate realizing a fairly large capital gain.

I understand I can either make quarterly estimate payment (in this case for the quarter the gain would be realized), or alternatively I can adjust my W-4 and MI W-4 (I'm resident in Michigan) to increase my federal and state W-2 income withholdings to make up for the shortfall in my capital gains tax liability.

It seems to me increasing the withholding make more sense, since there are still half the year remaining to have my increased withholding kick in. And I don't have experience making estimate tax payments previously, and don't want to introduce a new process (and deadlines) if I don't have to. It also seems once you make at least one quarterly estimated tax payment, you now have to check whether you can use the Annualized Income Installment Method to see whether you owe penalty for the underpayment (in my case no payment) for the other 3 quarters.

This is more of a general question for those of you that both work full-time with a W-2, and only occasionally have capital gains (via stocks, selling homes, etc). What is the easier way to make sure you don't underpay your tax? I'm slightly perplexed by the annualized income installment check. It seems to make more sense for folks who earn income and pay estimated tax on it throughout the year. But if you only sell stock once a year (and this is also not a pre-determined decision, for example I might not sell if the price drops), why should I be concerned with making equal payments throughout the other 3 quarters, rather just making sure I pay my tax for the quarter the gain was realized? 

Or is this just easier to increase withholdings on my paycheck and not deal with estimated tax?

[Bsch4477 · Accepted solution]

Your call, but just increasing your withholding seems simpler to me. 

[Mike9241]

talk to your employer because income taxes are usually withheld when RSU's are sold 

There will be no federal penalties for not paying in enough taxes during the year if withholding
1) and timely estimated tax payments equal or exceed 90% of your 2021 tax
or
2) and timely estimated tax payments equal or exceed 100% of your 2020 tax (110% if your 2020 adjusted gross income was more than $150K)
or
3) the balance due for 2021 after subtracting taxes withheld is less than $1,000
or
4) your total taxes for 2021 are less than $1,000

generally, tax professionals would use option 2 for their clients because the number is known before the end of 2021. this could include generating estimated tax payments if it looks like withholding won't be enough.

The annualized installment method works best for those who realize most of their income after the 5th month. The AI method requires every line item on the return to be determined for the first 3 months, then 5 months then 8 months and the whole year which is the same as what's on the return.

[S8NpTl]

I should clarify the taxes I'm referring here is not from the vesting of RSUs, of which the taxes are already withheld when they vested. 

I am referring to selling these RSUs, really no different than selling any ordinary stock here, except I was never in the position to realize such a sizable gain due to the amount of shares.

[Carl]

Basically, it's your choice. But stop over-thinking it.

And I don't have experience making estimate tax payments previously, and don't want to introduce a new process (and deadlines) if I don't have to

http://www.irs.gov/payments for the quarter you realize the gain, and you're done. You don't even have to wait for that quarter to get here either. So if you want to pay taxes for the 2021 fourth quarter, today, knock yourself out.