Need help understanding if I qualify for safe harbor, or do I need to pay estimated taxes for recent capital gains

[aclin]

To make the down payment for a home, I sold some stocks and incurred a big chunk of capital gains (a mix of long-term and short-term). This occurred early May, and I know the next estimated taxes due date is 6/15.

I work a regular salaried job so my main taxes are already paid through withholdings on my salary.

I've read up on the safe harbor rules about estimated taxes, which says I would not be penalized for not making estimated tax if any of these are true:

1. Come tax filing, after deductions and credits, it shows I owe less than $1,000
2. Come tax filing, it shows I already paid 90% of the taxes I owe for 2024
3. Come tax filing, it shows I already paid an amount equivalent to 100% of taxes I owed in 2023

My questions:

1. Since taxes are technically "pay as you go", would a large influx of capital gains/income in Q2 mean I actually have to clear a larger tax bill for Q2 (6/15)? Does that mean I could still be penalized since my withholdings may not be enough so far even if I manage to meet any of the 3 criteria by the end of the tax year?
2. If I know I can meet the criteria above by the end of tax year, do I still have to pay the estimated tax on time? I'm light on cash right now, but I can make some payments later to be in safe harbor. Would I still be penalized for not paying estimated taxes on time? What about interest on taxes owed?

Thanks!

[Bsch4477]

Income taxes withheld from wages are deemed to be paid evenly throughout the tax year.  So to avoid any unpleasant surprises at tax time you could just increase your W-2 withholding an appropriate amount to account for your capital gains. 

[NCperson]

@aclin - the current interest rate is 8%.  So you may just decide that is the cost of being tight on cash now but able to cover everything to meet safe harbor later in the year.  It's a lot cheaper than taking out a cash advance on a credit card! 

[Mike9241]

since it seems you anticipate your 2024 taxes to be greater than your 2023 taxes, if your 2024 withholding is at least equal to 100% of 2023 taxes (110% if your adjusted gross income for 2023 was $150,000 or more) then you would be safe from underpayment of estimated taxes penalties come 4/15/2025 no matter how much you owe.   

I 'll alert you not to wait to the last minute to increase withholding if needed.   there are situations where the increase does not go through in 2024 leaving you short and subject to penalties. 

[dmertz · Accepted solution]

If all of your tax payments throughout the year are in the form of tax withholding, there will be no penalty if you meet any one of the safe harbors because, as Bsch4477 said, income and withholding are, by default, treated as received and paid evenly throughout the year.  However, if some of your tax payments are made as estimated tax payments, these are only treated as made when actually paid to the IRS, so your tax payments will not be treated as made evenly (unless the estimated tax payments are all the same for each quarter) and could result in an underpayment for one or more quarters.  For example, even if you meet the safe harbors, if all of your tax payments are in the form of a Q4 estimated tax payment, you would have underpayment for some earlier quarters unless all of your taxable income was received only in Q4 (which you would have to show by filing Schedule AI of Form 2210).

[sdh11]

A clarifying question as I am in a similar situation for 2025 but slightly different circumstances. I have a large long-term capital gain in Q1 of 2025. I am not currently working so do not have any active withholdings. Can I avoid underpayment penalties by paying the full safe harbor amount before 4/15/25 (110% of my 2024 taxes liability) or do I need to pay the full estimated tax on the gain by 4/15/25? I am hoping that if I satisfy the safe harbor in Q1 2025, I will not have to pay the balance due until 4/15/26 with my 2025 taxes but absolutely do not want to be subject to any underpayment penalties.

[dmertz]

Disregard.

[sdh11]

I just got the distribution/capital gain in January of 2025. I'm looking to understand what to pay and when by 4/15/25. Am I ok if I pay the full safe harbor amount in Q1 of 2025?

[dmertz]

@sdh11 , I think I misread your earlier post as indicating that the large capital gain was in January 2024.

All you need to do to meet the safe harbor for 2025 is make sure that that at least 25% of 110% of your 2024 tax liability.  That would mean paying 27.5% of your 2024 tax liability each quarter.  Of course you could pay all 110% in  Q1 if you like.  What I usually do is pay the 27.5% for each of the first 3 quarters, then in early January do a a calculation of my expected actual tax liability and adjust the Q4 estimated tax payment downward if I can  do so while still avoiding a Q4 underpayment.

[sdh11]

So 27.5% per quarter is all I need to avoid any underpayment penalties? The IRS won't try to say that since I earned it in Q1, I have to pay it in Q1? 

[NCperson]

@sdh11 that is correct.  Look at form 2210 and 2210ai.  If you check off option C, the way @dmertz describes it is how it works. 

[dmertz]

Correct.  Unless you choose to annualize income on Schedule AI of Form 2210, which wouldn't make sense under these circumstances, your income is treated as received evenly throughout the year.