Stock Options

[Masa131]

Hello

I left my employer in January and decided to retire.

I sold the stock options from the former employer in June and got about $4M proceed. They are all qualified for the long-term investment.

I live in Hawaii. So, I assume I must pay 20% to Federal and 7.25% Hawaii as the long-term capital gain tax.

Questions:

1. Is my understanding correct?
2. How do I calculate how much I should pay by 9/16 and 1/15?
3. If I sell more stock options later in this year, for example additional proceed of $500K, how do I calculate and change the estimated tax amount?
4. How can I make the estimated tax for Fed and HI? Is there any online links?
5. If I miss the deadline (9/16 and 1/15) can I still pay the estimated tax later like 9/31 and 1/31?
6. What is the penalty of not paying the estimated tax until I file the 2024 tax by 4/15?

[KNDavis · Accepted solution]

Hi Masa131!

Congratulations on your retirement!

I'll go through each of your questions.  

1. Is my understanding correct?
   Yes, the tax rates you mention (20% Federal and 7.25% HI) are correct for long term capital gains.  But don't forget the Net Investment Income Tax, which is an additional 3.8% of any investment income.  
   
   
2. How do I calculate how much I should pay by 9/16 and 1/15?
   The estimated tax payment due 9/16 should cover the tax for income through 8/31.  For the stock options, you'll need to calculate your taxable gain by subtracting your cost basis from the proceeds.  If you have any other taxable income besides the capital gains, you will need to take this into account also.
   
   
3. If I sell more stock options later in this year, for example additional proceed of $500K, how do I calculate and change the estimated tax amount?
   If a later stock sale occurs after 8/31, the tax payment for that income is due 1/15/2025.  You would follow the same approach by calculating the total tax you expect to owe and subtract the payment made on 9/16.
   
   
4. How can I make the estimated tax for Fed and HI? Is there any online links?
   Yes, you can make Federal estimated tax payments online at www.irs.gov/payments.  Hawaii estimated payments can be made at https://hitax.hawaii.gov/_/. 
   
   
5. If I miss the deadline (9/16 and 1/15) can I still pay the estimated tax later like 9/31 and 1/31?
   If you miss the payment deadline, you can always make a late payment.  The IRS will still consider the payment late and calculate interest for the days the payment is late, but it's better than waiting to the next installment date or 4/15.  
   
   
6. What is the penalty of not paying the estimated tax until I file the 2024 tax by 4/15?
   The current rate for IRS underpayment penalty is 8%.  This rate is updated quarterly, but it has been 8%  for several quarters now.
   
   

Thanks for participating in TurboTax's Ask the Expert event today.  I hope this information was helpful!

Sincerely,

Kimberly, CPA for over 30 years

[dev145]

1. Yes, your understanding is correct.

2. You can use IRS worksheet or TurboTax tax calculator to estimated your estimated taxes. Remember to divide yearly estimated payment in two since only two quarters are left. 

https://www.irs.gov/pub/irs-pdf/f1040es.pdf

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

3. If you have more gains later in the year, you have to recalculate your estimate payments for last quarter.

4. Here is a link to both to make estimated payments. There are several methods you can use. 

https://www.irs.gov/payments

Hawaii Tax Online

5. Yes, if you miss a deadline, you can still pay estimated taxes but there might be under payment penalty.

6.  Both IRS and state will charge under payment penalty based on certain factors. Here is a link for more info for Under payment penalty. 

https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty

https://files.hawaii.gov/tax/forms/2022/n210ins.pdf

Hope this answers all your questions. 

[Masa131]

Hi Kimberly,

Thank you so much for your clear response.

I did not know about 3.8% Net Investment Income Tax. This is another kick in the head and stomach. I assume this is for Fed and basically I have to calculate the estimated tax based on 23.8% (20% + 3.8%), correct?

8% penalty for late payment. This rate is annual and you calculate the penalty dollar amount based on prorated amount, for example if you are 3 month late from the deadline, it will be 8% x 3 month / 12 months = 2%, correct?  

[Masa131]

Thank you so much for your response. 

[KNDavis]

Hi Masa131,

The 3.8% Net Investment Income Tax applies only to investment income - generally interest, dividends and capital gains.  

The IRS calculates interest based on days, not months, but in theory, your calculation is correct.

I'm glad this information was useful.  Thanks again!

Kimberly, CPA

[Masa131]

Thank you again, Kimberly. I got all information I was hoping to get.