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How do I make estimated tax payments after a home sale and avoid penalties?
I retired at the beginning of this year. I'm only getting income from rental property and not enough for the need to pay estimated taxes. So I made no estimated payment for the 1st quarter this year. I sold my home in May and will have a capital gain of $250k above the home owner exemption. I am looking at a tax liability for this year of about $40k. Last year my tax liability was about $14k. How can I handle the estimated tax payments to my best advantage?
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How do I make estimated tax payments after a home sale and avoid penalties?
Since you sold the home in May, which is in the second quarter of the year, the lack of a 1st quarter payment shouldn't be a problem. When you prepare your 2019 income tax return and if TurboTax indicates you might owe an underpayment penalty, work through the "Underpayment Penalties" interview and "annualize" your income using the interview. That process will move 1/4th of the gain on the sale out of the 1st quarter and into the 2nd quarter where it belongs.
"How can I handle the estimated tax payments to my best advantage?"
It depends on what you mean by that. If your desire is to file a 2019 income tax return that doesn't require a large check being sent to the IRS then make estimated tax payments for the remaining 3 quarters that comes close to that $40K figure. On the other hand if you don't like making a large interest-free loan to the federal government then make payments that cover 100% or 110% of your 2018 tax liability, getting you into the "100%/110% of last year's tax liability" "save harbor" to avoid an underpayment penalty. You'll write a large check to the IRS when you send in your 2019 income tax return, but that check won't include underpayment penalties.
Tom Young
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How do I make estimated tax payments after a home sale and avoid penalties?
Since you sold the home in May, which is in the second quarter of the year, the lack of a 1st quarter payment shouldn't be a problem. When you prepare your 2019 income tax return and if TurboTax indicates you might owe an underpayment penalty, work through the "Underpayment Penalties" interview and "annualize" your income using the interview. That process will move 1/4th of the gain on the sale out of the 1st quarter and into the 2nd quarter where it belongs.
"How can I handle the estimated tax payments to my best advantage?"
It depends on what you mean by that. If your desire is to file a 2019 income tax return that doesn't require a large check being sent to the IRS then make estimated tax payments for the remaining 3 quarters that comes close to that $40K figure. On the other hand if you don't like making a large interest-free loan to the federal government then make payments that cover 100% or 110% of your 2018 tax liability, getting you into the "100%/110% of last year's tax liability" "save harbor" to avoid an underpayment penalty. You'll write a large check to the IRS when you send in your 2019 income tax return, but that check won't include underpayment penalties.
Tom Young
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How do I make estimated tax payments after a home sale and avoid penalties?
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How do I make estimated tax payments after a home sale and avoid penalties?
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How do I make estimated tax payments after a home sale and avoid penalties?
As the OP is looking at a tax liability considerably larger than the previous year's tax liability and apparently has no more taxes being withheld, (retired), then he MUST make estimated tax payments to avoid an underpayment penalty as the penalty is calculated on a quarter-by-quarter basis. With the bulk of that tax liability arising, (I assume), from the house sale in the second quarter even annualizing the income - putting all of the capital gain into the second quarter - would result in a penalty for the last 3 quarters of the year.
@sportsman2492
If you have no taxes at all being taken out of your retirement checks then you could be underpaid for the 1st quarter in any case. But if you are having taxes withheld then estimate the amount of withholding for the year, subtract that amount from the 2018 tax liability, divide the result by 3, (maybe round up a bit to the hundred's place), and mail those payments in on time.
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How do I make estimated tax payments after a home sale and avoid penalties?
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How do I make estimated tax payments after a home sale and avoid penalties?
see the following link on irs.gov about estimated taxes: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
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