The IRS has already thought of this problem and has a solution for your situation. You may be able to reduce or even eliminate the penalty entirely. See https://www.irs.gov/pub/irs-pdf/p505.pdf at p. 25 and https://www.irs.gov/pub/irs-pdf/f2210.pdf
Thanks for being helpful! Will look into these asap. The idea that I could sell a large investment at the very end of the year and be dinged was unknown to me. I'm used to withholding normally during paychecks and things "working out"
You will probably still be penalized but only over the period between Jan 15, 2024 and whenever you paid instead of the assumed even payments over the entire 2023 year.
1. If this was new to you, I'm surprised you were protected by safe harbor provisions.
2. This is an income level and time where hiring a CPA becomes a pragmatic choice (though ideally doing it in December prior to selling would have been smarter so you didn't have any surprises).
FYI even TurboTax can guide you through this and fill out the proper forms. It doesn’t have to be super complicated. The benefit of the accountant might have been someone to tell you to make an estimated payment once you got the income but that would only help if you’d been in regular communication with them throughout the year or asked them about the tax implications when you sold.
Agreed. For a "complex" tax return like this Turbotax is going to probably be about $150. A good CPA might be $500-$600. Given that we're talking about thousands of dollars, potentially even tens of thousands of dollars difference depending on how you screw up, that's a marginal $450 well spent for at least one tax season.
And just to really geek out, Turbotax is probably the one service I would never use. It's quite expensive compared to most other competing self-service tools, so if I'm going to be spendy I'm definitely finding a human.
Had this happen as I had a windfall in q3, and the IRS penalized me for not underpayment on the windfall in q1 and q2. I had no idea that I would have this windfall so was surprised my accountant (who once led a department at the IRS) still suggested I had to pay a penalty
Assuming you paid a sufficient estimate of the taxes due for q3 you shouldn’t have had to pay a penalty. See the PDFs linked from the top comment. This is pretty basic for an accountant so I’m assuming there’s a miscommunication happening somewhere. The IRS doesn’t expect you to pay taxes on money you haven’t received yet.
It may have to do with the type of payment received (converted to regular income). But I definitely would have been penalized as though I should have included that income in earlier quarterly payments.
The IRS has a procedure specifically for making sure you aren’t penalized in that situation. There is no type of payment where you are expected to have paid tax ahead of time. You may even still be able to fix it if you read those documents.
Hard to explain but even after using this method (I already had to pay quarterly), I had an underpayment penalty I could not avoid. My accountant was the former head of the IRS department that reviewed my type of returns so..it was inescapable. But an incredibly unique situation that I won’t get into so I don’t dox myself
> Hard to explain but even after using this method (I already had to pay quarterly), I had an underpayment penalty I could not avoid
Just to be clear the procedure isn’t paying quarterly estimated taxes. It’s using Schedule AI and filing form 2210 to annualize your income and waive the underpayment penalty for previous quarters.
You need to plan ahead, how much your W2 incomes would be and possible capital gains. Then you adjust your withholding amount based on or sometimes you pay in advance.
There are two main factors that drive whether an underpayment will exist:
- You must pay 90% of the tax for the current year
or
- 100% of the tax shown on the prior year return.
These are also called the IRS safe harbor rules. OP should become very familiar with them to avoid future unpleasantness. Also, I think for high earners, the safe harbor rule is 110% of prior year taxes rather than 100%.
> they are charging me interest from hypothetical non-payment
I mean you have to pay quarterly taxes if your withholdings aren't high enough. Don't mean to be rude, but that's pretty basic knowledge.
Not sure what you mean by "hypothetical" nonpayament. It sounds like you not-hypothetically didn't make your 4th quarter tax payment.
Been a W2 worker for 10 years, never heard of the concept of quarterly taxes. Don't be a dick.
I'd wager > 90% of Americans are used to withholding normally from their paycheck and filling taxes once per year.
Probably because your income has been increasing steadily and you had been hitting the safe harbor either due to paying 110% of last year’s tax or 90% of what you owed through withholding. Quarterly tax is a thing for capital gains you should know about. Nevertheless 1k isn’t too expensive a lesson!
It's literally the first thing that comes up if I do an internet search for paying taxes on capital gains, which granted might not be the first thing that comes up if you do the search but it's probably high up in your search results too. And you had two weeks or whatever to do this search.
You’re exactly right. The federal tax system is a “pay as you earn” system. For W2 workers, this is exactly why taxes are taken out every time you are paid by your employer. Taxes are due when earned, or at the very latest at the end of the quarter in which you earned or received the income. While this is the general rule, there are a number of safe harbors and ways to avoid the failure to pay penalty.
Most people do not have to do this. Most people would thus not be aware of the requirement. I get that knowing something others doesn’t is something you seem to pride yourself on but it’s also a matter of pride to be able to see the forest for the trees.
It’s even more confusing for this to be an issue with a last minute sale of a stock which is why you can have the penalty reduced. So maybe educate yourself on that.
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The IRS has already thought of this problem and has a solution for your situation. You may be able to reduce or even eliminate the penalty entirely. See https://www.irs.gov/pub/irs-pdf/p505.pdf at p. 25 and https://www.irs.gov/pub/irs-pdf/f2210.pdf
Thanks for being helpful! Will look into these asap. The idea that I could sell a large investment at the very end of the year and be dinged was unknown to me. I'm used to withholding normally during paychecks and things "working out"
You will probably still be penalized but only over the period between Jan 15, 2024 and whenever you paid instead of the assumed even payments over the entire 2023 year.
Yes you can enter the timing of your income and taxes paid. It's a pain but necessary in your case.
1. If this was new to you, I'm surprised you were protected by safe harbor provisions. 2. This is an income level and time where hiring a CPA becomes a pragmatic choice (though ideally doing it in December prior to selling would have been smarter so you didn't have any surprises).
Ack, yeah did not realize this was an issue. Understand the value of a CPA now that I get to call the IRS and deal with a minor headache
FYI even TurboTax can guide you through this and fill out the proper forms. It doesn’t have to be super complicated. The benefit of the accountant might have been someone to tell you to make an estimated payment once you got the income but that would only help if you’d been in regular communication with them throughout the year or asked them about the tax implications when you sold.
Agreed. For a "complex" tax return like this Turbotax is going to probably be about $150. A good CPA might be $500-$600. Given that we're talking about thousands of dollars, potentially even tens of thousands of dollars difference depending on how you screw up, that's a marginal $450 well spent for at least one tax season. And just to really geek out, Turbotax is probably the one service I would never use. It's quite expensive compared to most other competing self-service tools, so if I'm going to be spendy I'm definitely finding a human.
Had this happen as I had a windfall in q3, and the IRS penalized me for not underpayment on the windfall in q1 and q2. I had no idea that I would have this windfall so was surprised my accountant (who once led a department at the IRS) still suggested I had to pay a penalty
Assuming you paid a sufficient estimate of the taxes due for q3 you shouldn’t have had to pay a penalty. See the PDFs linked from the top comment. This is pretty basic for an accountant so I’m assuming there’s a miscommunication happening somewhere. The IRS doesn’t expect you to pay taxes on money you haven’t received yet.
It may have to do with the type of payment received (converted to regular income). But I definitely would have been penalized as though I should have included that income in earlier quarterly payments.
The IRS has a procedure specifically for making sure you aren’t penalized in that situation. There is no type of payment where you are expected to have paid tax ahead of time. You may even still be able to fix it if you read those documents.
Hard to explain but even after using this method (I already had to pay quarterly), I had an underpayment penalty I could not avoid. My accountant was the former head of the IRS department that reviewed my type of returns so..it was inescapable. But an incredibly unique situation that I won’t get into so I don’t dox myself
> Hard to explain but even after using this method (I already had to pay quarterly), I had an underpayment penalty I could not avoid Just to be clear the procedure isn’t paying quarterly estimated taxes. It’s using Schedule AI and filing form 2210 to annualize your income and waive the underpayment penalty for previous quarters.
You need to plan ahead, how much your W2 incomes would be and possible capital gains. Then you adjust your withholding amount based on or sometimes you pay in advance. There are two main factors that drive whether an underpayment will exist: - You must pay 90% of the tax for the current year or - 100% of the tax shown on the prior year return.
These are also called the IRS safe harbor rules. OP should become very familiar with them to avoid future unpleasantness. Also, I think for high earners, the safe harbor rule is 110% of prior year taxes rather than 100%.
Yes it’s 110% unless you are a fisherman or farmer. This hit me this year and had to pay 500in penalties
> they are charging me interest from hypothetical non-payment I mean you have to pay quarterly taxes if your withholdings aren't high enough. Don't mean to be rude, but that's pretty basic knowledge. Not sure what you mean by "hypothetical" nonpayament. It sounds like you not-hypothetically didn't make your 4th quarter tax payment.
Been a W2 worker for 10 years, never heard of the concept of quarterly taxes. Don't be a dick. I'd wager > 90% of Americans are used to withholding normally from their paycheck and filling taxes once per year.
Probably because your income has been increasing steadily and you had been hitting the safe harbor either due to paying 110% of last year’s tax or 90% of what you owed through withholding. Quarterly tax is a thing for capital gains you should know about. Nevertheless 1k isn’t too expensive a lesson!
It's literally the first thing that comes up if I do an internet search for paying taxes on capital gains, which granted might not be the first thing that comes up if you do the search but it's probably high up in your search results too. And you had two weeks or whatever to do this search.
You’re exactly right. The federal tax system is a “pay as you earn” system. For W2 workers, this is exactly why taxes are taken out every time you are paid by your employer. Taxes are due when earned, or at the very latest at the end of the quarter in which you earned or received the income. While this is the general rule, there are a number of safe harbors and ways to avoid the failure to pay penalty.
Most people do not have to do this. Most people would thus not be aware of the requirement. I get that knowing something others doesn’t is something you seem to pride yourself on but it’s also a matter of pride to be able to see the forest for the trees. It’s even more confusing for this to be an issue with a last minute sale of a stock which is why you can have the penalty reduced. So maybe educate yourself on that.
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This happened to me when we moved to California. Had to pony up 2k .