How do I make estimated tax payments after a home sale and avoid penalties?

[sportsman2492]

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? 

[TomYoung · Accepted solution]

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

[sportsman2492]

I prefer to hold onto the money as long as I can. To pay 100% of 2018 tax liability would I divide the amount between the remaining 3 quarters or send in one lump sum in the 2nd quarter?

[robtm]

If you want to hold onto your money as long as you can, then then you would wail until jan.15, 2020 to send it in in one lump sum. However it seems to me to make more sense to divide it into 3 equal payments.

[TomYoung]

@robtm

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.  

[sportsman2492]

Thank you Tom, you have been a big help! Just so you know, I retired early. Not getting social security yet. Living on income from rental property. After depreciation and deductions I am just below the threshold for estimating taxes. Until this house sale of course. Thanks again.

[robtm]

see the following link on irs.gov about estimated taxes: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes