How to pay taxes on granted Class B shares after company was sold.

[RLongIslandA]

Wife's company granted her both Class B and C shares as part of her equity package a few years ago. The company was now sold (several years later) and we were paid out for her shares. I am told we will not get any tax paperwork from the sale for another few months since there is a final settlement in March. How do I pay estimated taxes on the initial transaction? 

[DianeW777]

The estimated tax is based on your overall tax situation. In this situation you are dealing with lucrative capital gains tax rates.  You can use the rate that applies to you below.  First review the information about stock basis to allow you to determine your taxable gain.

Depending on your overall tax rate for your regular income, you will use 10% or 15% of the gain as an estimated payment assuming you do have taxable income without this income.  The payment will be due on April 18, 2022 for the 2022 tax year.

There was a stock basis when your wife was granted the shares in her equity package.  Try to locate the paperwork that came with them at the time. Next review the links below to determine which type the stocks were. Then the information will help you determine the cost basis for your wife.

• Nonqualified Stock Options (NQSO)
• Incentive Stock Options (ISOs)

Worse case scenario is that you have no cost basis or are unable to arrive at a cost basis - the full amount of your purchase price from the new company will be capital gain since you held the stock more than one year.  This would not be the normal scenario.  It's quite likely you will be able to determine the cost basis.

Best case scenario is that you arrive at a cost basis and only the difference between that and the purchase price will be taxable at capital gains tax rates.

Capital Gain Tax Rates

The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than or equal to $40,400 for single or $80,800 for married filing jointly or qualifying widow(er).

A capital gain rate of 15% applies if your taxable income is more than $40,400 but less than or equal to $445,850 for single; more than $80,800 but less than or equal to $501,600 for married filing jointly or qualifying widow(er); more than $54,100 but less than or equal to $473,750 for head of household or more than $40,400 but less than or equal to $250,800 for married filing separately.

However, a net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.

[RLongIslandA]

First off, thanks for the wonderfully detailed reply. One question that comes up before I dig further is if this payment was made to us in December do I just submit this payment with my 2021 tax submission which will be in late February? 

[RLongIslandA]

Also, can this transaction be done within TurboTax? If so, where do I account for it? This is all new to me. Given that I don't have an official document to record this threw me for a loop. 

[DianeW777]

It depends.  If you have enough withholding or tax payments paid in for the 2021 tax return that will cover last year's tax by 100% then you can wait until you file your tax return because there should be no penalty for underpayment. See all penalty exceptions below.

• Check all your payments made through withholding or estimated payments and compare that to your 2020 Form 1040, line 24. It it is 100% then you can wait until you file.

In general, you may owe the penalty for 2021 if the total of your withholding and timely estimated tax payments didn't equal at least the smaller of:

1. 90% of your 2021 tax, or

2. 100% of your 2020 tax. Your 2020 tax return must cover a 12-month period.

   • Higher income taxpayers. If your adjusted gross income (AGI) for 2020 was more than $150,000 ($75,000 if your 2020 filing status was married filing separately), substitute 110% for 100% in (2) above.

And I might add, that if you actually file it in late February, and if there is any late payment penalty (January 15th - file date), it should be minimal but it will occur because the payment is already late. 

[DianeW777]

Perhaps.  If you choose to make the payment with your tax return after reviewing the information, then TurboTax will ask you how you want to pay and provide all you need based on your method of choice.

If you want to pay an estimated tax payment you will have to use Form 1040-ES.  Be sure to use payment voucher 4 to include with your payment if you decide to mail it. You could also choose to use Pay Online. 

[RLongIslandA]

Okay, so I will pay online using the info you have provided. When completing my actual return will there be a place that I list this income and payment to keep my return complete? Sorry for all the newbie questions, although I have been doing my own taxes for over 40 years this is ALL NEW to me. Thanks again for the great information!

[RLongIslandA]

@DianeW777 The capital gain will be taxable at the 15% rate. Looking at the 1040-ES I don't see any line related to company granted shares sold. I just want to pay the right amount now to minimize any applicable penalties. If I use payment voucher 4 is any other documentation required with the payment submission? Do I need to fill out the 1040ES also and submit that with the payment voucher? 

If the online payment option is used, do I just submit the dollar amount or is there some other paperwork needed to be submitted? 

Can New York State capital gains okay to pay with my 2021 tax filing or do those need to be prepaid also? 

[DianeW777]

For online you just put in the amount and pay that, no paperwork is submitted.  If you mail the payment, you need to send only the payment voucher and the check. You can figure your regular tax rate on all other income, then at 15% for capital gains tax.  Keep in mind that to avoid ANY penalty, you simply need to make sure 100% (or 110%) of last year's tax has been paid.  You can send any balance with the return and there will be no penalty.

You could have some underpayment penalty with New York as well, however if you do pay with the return it should be minimal penalty due to the short number of days paid late. Here are some links that may be helpful.

• For New York you can use this link: Make an Estimated Payment 
• It appears that New York State Capital Gains Tax is the Same as Ordinary Income Tax. You can visit NYS Department of Revenue site for more information.

[RLongIslandA]

@DianeW777 I have submitted my payment to the IRS for the capital gain. I am reviewing my return on Turbo Tax and it is not clear where this type of income should be listed? Which income category is the correct one? 

[DianeW777]

This income is considered investment income and will be reported as a stock sale for capital gain treatment as noted in our earlier discussion.  You should be receiving a Form 1099-B to report the sale and of course you will have your cost basis. 

• Federal Taxes tab (or Personal, if working in TurboTax Self-Employed/Home & Business), > Wages & Income, > Investment Income, > Stocks, Mutual Funds, Bonds, Other.  Follow the prompts to enter the 1099-B information.
  • You will have the option to import, however I suggest you enter it yourself in your situation.

[RLongIslandA]

I think this is the right answer... however, there was no "stock" per se. It was a privately held firm and she was granted "Class B" and "Class C" units (the word stock was not anywhere in the paperwork). They only had value if and when the entity was sold. At which time she got compensated for the "vested" units. Thanks for your help. 

[Charlie2013]

Hi,

I have a very similar situation. I was granted some class B shares by my employer a few years ago and the company was sold last summer and I was paid out. I paid taxes immediately using my turbotax return from 2020, form 1040-ES, I entered a higher amount than I was actually paid out, so I did not get any surprises at file time, my W-2 income was actually a bit less than 2020, so I expected a refund when filed this year. I have received a K-1 form from my employer, but as it turns out I still owe a significant amount of money according to turbotax. Any idea why that is?

[GeorgeM777]

The tax may not have anything to do with the sale of the class B shares but with other income.  Although, you mentioned that you did withhold more than enough to cover the taxes.  In this regard, did you check your cost basis on the class B shares to ensure it is correct?  We assume you should only be concerned with whether the sale of the class B shares resulted in a gain or loss as the value of the shares when granted would have likely already been included on your W-2 in the year the shares vested with you. 

@Charlie2013