Hello! I've been looking into the safe harbor rules with the purpose to avoid underpayment of estimated tax penalty in TY2026 while putting that money to work. I would greatly appreciate your input on my reasoning.
TY2025: I was unemployed all year-long but realized capital gains. Total tax owed was $0 (Federal Tax) and $7k (State Tax).
TY2026: I am back to work and expect to have significant capital gains with a projected total tax liability (including ordinary income tax) of $65k (Federal) and $30k (State).
My strategy for TY2026 consists in making a single large State Tax payment of $8k (>110% of TY2025's State Tax liabilities) before April 15, 2026 (Q1 deadline) so that any other additional income received throughout the year is shielded against any underpayment of estimated tax penalty. This way I won't owe any more Federal/State Taxes until Q2 2027 when TY2026's taxes are due, regardless of total annual income.
Then, I intend to submit a W-4 so that no federal and state taxes are withheld from my paycheck since I would be shielded by the safe harbor rules. By doing this I get a larger monthly paycheck that would allow me to generate some yield on my "tax-owed" money. Is my reasoning OK? Do you see any flaws here?
Note 1: I am very responsible with my taxes and will put the estimated amount in a low-yield, highly-liquid money market account on a timely manner to earn some yield until TY2026's taxes are due. My intention here is not to avoid paying taxes on my ordinary income, but to defer them for as long as possible while earning some yield on them. Picture it as getting some yield on the "artificial" extra pay for ~1 year.
Note 2: Instead of doing a $8k one-time payment by April 15, 2026; I could also adjust my employer State Tax withholdings so that it adds up to $8k by December 31, 2026. As employer-withheld taxes are always treated as paid on time, I would still be protected by the safe harbor rules while avoiding a big one-time payment. Is that correct?
