Sold house need to determine estimated taxes

[tomlamson]

I sold my house in August 2023 for a large profit. I want to determine estimated Federal and California State taxes to avoid a penalty. Next Federal quarterly payments are due September 15, 2023 and January 16, 2024.

TurboTax support stated the following:

In most cases, to avoid a penalty, you need to make estimated tax payments if you expect to owe $1,000 or more in taxes for the year—over and above the amount withheld from your wages or other income. (TRUE FOR US) In some cases, though, the $1,000 trigger point doesn't matter.

If your prior year Adjusted Gross Income was $150,000 or less (TRUE FOR US) , then you can avoid a penalty if you pay either 90 percent of this year's income tax liability or 100 percent of your income tax liability from last year (dividing what you paid last year into four quarterly payments). This rule helps if you have a big spike in income one year, say, because you sell an investment for a huge gain or win the lottery.

I take that to mean that can pay 25% or slightly more of last years taxes before September 15, 2023 and January 16, 2024 to avoid a penalty. Is that correct?

Does the same apply to California estimated tax?

[Carl]

Typically, if you pay the IRS 20% of your gain in the quarter you received that gain, then come tax time you'll be fine. For the state, if you pay whatever that highest tax rate is in the state in the quarter the gain is received, then you'll be fine there too at tax time and will most likely end up getting some of it refunded back. Last I checked, the highest tax rate in CA was something like 12.3%.

[tomlamson]

My goal is to avoid paying a penalty and postponing paying as long as possible.

I worked through Form 1040-ES: Estimated Tax for Individuals and it appears that I don't need to pay ANY estimated taxes and I won't pay a penalty.

It states:

In most cases, you must pay estimated tax for 2023 if both of the following apply.
1. You expect to owe at least $1,000 in tax for 2023, after subtracting your withholding and refundable credits.

--- TRUE FOR ME
2. You expect your withholding and refundable credits to be less than the smaller of:
a. 90% of the tax to be shown on your 2023 tax return,

     VERY LARGE FOR ME
or
b. 100% of the tax shown on your 2022 tax return. Your 2022 tax return must cover all 12 months

    VERY SMALL FOR ME SINCE MY 2022 INCOME WAS SMALL AND MY WITHOLDING WAS LARGE

Simplifying #2:

2. You expect your withholding and refundable credits to be less than 100% of the tax shown on your 2022 tax return. 

--FALSE FOR ME

1 is true but 2 is false so I do not need to pay estimated Federal taxes. Correct?

I just need to know if California uses the same logic.

[tagteam · Accepted solution]

You are correct with regard to federal and it appears as if California follows federal.

See https://www.ftb.ca.gov/pay/estimated-tax-payments.html#Who-must-pay

Who must pay

Generally, you must make estimated tax payments if in 2022 you expect to owe at least:

• $500
• $250 if married/RDP filing separately

And, you expect your withholding and credits to be less than the smaller of one of the following:

• 90% of the current year’s tax
• 100% of the prior year’s tax (including alternative minimum tax)

[ee-ea]

See  this FTB info   https://www.ftb.ca.gov/pay/estimated-tax-payments.html

[Hal_Al]

The capital gain on the sale of your primary home is not taxable (up to $250K, $500K married). To be eligible you must have lived in and owned the home for at least 2 out of the 5 year prior to sale. You do not even need to report it on your tax return, unless you got a tax document, usually a 1099-S. The 1099-S may have been included in your closing documents, instead of arriving in the mail, in Jan. or Feb. of the following year.

California follows the same rule, as the feds, for the home sale exclusion. 

If you gain is fully excluded, no estimated payment is needed.