Tax discussion, strategies and questions

[capster]

Turns out the IRS has a "safe harbor" rule for estimated taxes. This rule means that if you pay 90% of the tax you owe or 100% (110% for higher income filers) of the prior year’s tax as estimated tax, you will not be subject to underpayment penalties if you wind up owing more.

This is pretty nice if you’ve made a Roth conversion that is going to result in taxes that are much higher than are one’s previous norm. It seems payment of the above safe harbor amount would be due at the normal time, April 15.

So, for all the shorts out there hoping to trap out before earnings those selling shares to pay taxes on a conversion, here’s a tiny violin playing sad songs just for you.

How the safe harbor for estimated tax can help you avoid underpayment penalties

Learn about the estimated tax payment safe harbor guidelines with the tax pros at H&R Block. We’ll outline the safe harbor rule and how to avoid the underpayment penalty.

www.hrblock.com

 

[mongo]

Turns out the IRS has a "safe harbor" rule for estimated taxes. This rule means that if you pay 90% of the tax you owe or 100% (110% for higher income filers) of the prior year’s tax as estimated tax, you will not be subject to underpayment penalties if you wind up owing more.

This is pretty nice if you’ve made a Roth conversion that is going to result in taxes that are much higher than are one’s previous norm. It seems payment of the above safe harbor amount would be due at the normal time, April 15.

So, for all the shorts out there hoping to trap out before earnings those selling shares to pay taxes on a conversion, here’s a tiny violin playing sad songs just for you.

How the safe harbor for estimated tax can help you avoid underpayment penalties

Learn about the estimated tax payment safe harbor guidelines with the tax pros at H&R Block. We’ll outline the safe harbor rule and how to avoid the underpayment penalty.

www.hrblock.com

Not tax advice:
The safe harbor deadline for estimated payments is January 15th (18th this year). April 15th is the true up date, any payment then IS an underpayment.
From form 2210 instructions:

In general, you may owe the penalty for 2021 if the total of your withholding and timely estimated tax payments didn't equal at least the smaller of:
1. 90% of your 2021 tax, or

2. 100% of your 2020 tax. Your 2020 tax return must cover a 12-month period

Note: 2) is 110% above a certain income.

 

[capster]

Not tax advice:
The safe harbor deadline for estimated payments is January 15th (18th this year). April 15th is the true up date, any payment then IS an underpayment.
From form 2210 instructions:

Note: 2) is 110% above a certain income.

What I tried to say was that you can pay the safe harbor estimated amount by Jan 18th this year and, then, if you need to pay more to cover all your taxes, you need to pay that remainder by April 15th. (I did write in my original post that the amount above the safe harbor estimated tax would be due April 15).

For example , if you paid X in taxes for 2020 and you need to pay 10X for 2021, then you can pay X (or 110% of X for high income filers) by Jan 18 and pay the remaining 9X (or 8.9X) by April 15.

Not tax advice—I’m sharing what I am learning as I go along and using this forum as a sounding board. So I appreciate your feedback @mongo.

It seems to me we are saying the same thing, but please correct me if I am wrong.

 

[mongo]

What I tried to say was that you can pay the safe harbor estimated amount by Jan 18th this year and, then, if you need to pay more to cover all your taxes, you need to pay that remainder by April 15th. (I did write in my original post that the amount above the safe harbor estimated tax would be due April 15).

For example , if you paid X in taxes for 2020 and you need to pay 10X for 2021, then you can pay X (or 110% of X for high income filers) by Jan 18 and pay the remaining 9X (or 8.9X) by April 15.

Not tax advice—I’m sharing what I am learning as I go along and using this forum as a sounding board. So I appreciate your feedback @mongo.

It seems to me we are saying the same thing, but please correct me if I am wrong.

Yeah, agree there so...
Ah, I see the issue

It seems payment of the above safe harbor amount would be due at the normal time, April 15.

You meant "payment above the safe harbor amount".

FWIW, I did just that. Roll converted some Roth in Dec, pulled RMD to pay for it in January.

 

[dhanson865]

Which begs the question: Why would anyone wish to sell shares, shares that will be far, far more valuable in the years ahead, when asset-based lending exists? [/URL]

I've got 3 words for you:

Required Minimum Distributions

If you need more than 3 words, I'll say that the vast majority of my TSLA is in 401k or the rollovers of past 401k accounts (would you still call that 401k or is it now officially an IRA?). Whatever the nomenclature something like 95% of my TSLA will be force sold eventually.

I've got a few years before that happens. I fully expect TSLA to 10x once or twice before then. But at some point I'll be forced to sell.

 

[Bet TSLA]

I've got 3 words for you:

Required Minimum Distributions

If you need more than 3 words, I'll say that the vast majority of my TSLA is in 401k or the rollovers of past 401k accounts (would you still call that 401k or is it now officially an IRA?). Whatever the nomenclature something like 95% of my TSLA will be force sold eventually.

I've got a few years before that happens. I fully expect TSLA to 10x once or twice before then. But at some point I'll be forced to sell.

If you're going to reply to questions, it helps to know what you're talking about. In the absence of that, cite reliable references. You're wrong about having to sell.

 

[tivoboy]

If you're going to reply to questions, it helps to know what you're talking about. In the absence of that, cite reliable references. You're wrong about having to sell.

Maybe you could cite a reference about how one doesn’t have to comply with IRS RMD rules in tax advantaged retirement accounts after one turns 72? Are you referring maybe to a 72t option? that would still require some selling to fund the withdrawal streams either way IF the “majority’ of each account is in TSLA shares. If you have knowledge of a way to get around required RMD, I’m sure many here would love to know about it.

 

[Bet TSLA]

Maybe you could cite a reference about how one doesn’t have to comply with IRS RMD rules in tax advantaged retirement accounts after one turns 72? Are you referring maybe to a 72t option? that would still require some selling to fund the withdrawal streams either way IF the “majority’ of each account is in TSLA shares. If you have knowledge of a way to get around required RMD, I’m sure many here would love to know about it.

I know of no way to get around having to do a required distribution. But selling stock is not required. Just transfer the stock out of the retirement account. This is trivial.

But I was giving the original provider of misinformation a chance to correct it, and maybe cure their ignorance. People eager to post wrong answers are a plague on this thread. It's best to just not post when you aren't well informed. Even when you are well-informed, it's best to check your information will a reliable authority (when there is one).

 

[tivoboy]

I know of no way to get around having to do a required distribution. But selling stock is not required. Just transfer the stock out of the retirement account. This is trivial.

But I was giving the original provider of misinformation a chance to correct it, and maybe cure their ignorance. People eager to post wrong answers are a plague on this thread. It's best to just not post when you aren't well informed. Even when you are well-informed, it's best to check your information will a reliable authority (when there is one).

Ah, so you mean one can transfer it out to a qualified charity or 501c3 to satisfy the RMD? Yes, a qualified charitable distribution would allow a stock TRANSFER vs. a sale and then monies transferred. Of course not all charities accept this, and it does imply that one WANTS to give it all away. It’s also capped at a maximum of 100K per year, so SOME of us may have higher RMD amounts than this would allow. So I guess technically it’s not a stock SALE, as would indeed be required to make the REQUIRED distribution from the account. I was really hoping you had another way to get around RMD’s since it’s a PIA for MOI.

or, maybe you mean just ransfer OUT of the tax advantaged account to a taxable account.. of course the entire amount of stock transferred is going to be taxed upon the distribution, so one is going to need to pay the taxes on the distributed amount regardless.. but maybe, technically the stock could move intact to another taxable brokerage account. I haven’t seen that done before, but MAYBE that’s possible? Not sure why I would do it though, would probably rather just sell in the tax advantaged account, move the $$ out, of course it is taxable income on the distributed amount, and then just re-invest the fresh $$ in either the same equity or other, or use some of the proceeds to pay the taxes due. I’ll have to look into that.. Seems a bit more convoluted.

 

[obie_fl]

I know of no way to get around having to do a required distribution. But selling stock is not required. Just transfer the stock out of the retirement account. This is trivial.

But I was giving the original provider of misinformation a chance to correct it, and maybe cure their ignorance. People eager to post wrong answers are a plague on this thread. It's best to just not post when you aren't well informed. Even when you are well-informed, it's best to check your information will a reliable authority (when there is one).

It may be trivial but how do you pay the taxes on it? It's a taxed withdrawal which could be big depending on his personal situation.

 

[dhanson865]

Maybe you could cite a reference about how one doesn’t have to comply with IRS RMD rules in tax advantaged retirement accounts after one turns 72? Are you referring maybe to a 72t option? that would still require some selling to fund the withdrawal streams either way IF the “majority’ of each account is in TSLA shares. If you have knowledge of a way to get around required RMD, I’m sure many here would love to know about it.

Maybe BetTSLA thinks everyone has all their funds in a Roth?

Retirement Plans FAQs regarding Required Minimum Distributions | Internal Revenue Service does say that Roth accounts don't require RMDs.

And while I have a roth account, I have way more funds in a non roth accounts

"Your required minimum distribution is the minimum amount you must withdraw from your account each year.

• You can withdraw more than the minimum required amount.
• Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts)."

so yeah, I'm not sure what the big adavantge he thinks it is to "not sell" and just move the stock around. It's still marked as income at that point.

 

[tivoboy]

Maybe BetTSLA thinks everyone has all their funds in a Roth?

Retirement Plans FAQs regarding Required Minimum Distributions | Internal Revenue Service does say that Roth accounts don't require RMDs.

And while I have a roth account, I have way more funds in a non roth accounts

You mean you didn’t put your Tesla founders shares in your ROTH IRA 15 years ago? I know my buddy Peter did..;-)

yes, there are no AFTER tax funded accounts that require RMD’s..2020 provided a bit of a respite, one was allowed to suspend any RMD’s for the year but they are back for 2021. I get it, gov’t wants their money and doesn’t want a whole bunch of silliness moving money from one generation to a spouse to the next generation often tax free or very LOW taxed. But for some of the old fogies who continue to be very productive in their early 70’s and beyond, I’d like to see some leniency for the requirement as all it does is increase taxable income unnecessarily. First world problems for sure, but many of these rules were written for a different time - although life expectecny is down nearly THREE years for an American male now, so they may just up the formula.

 

[dhanson865]

You mean you didn’t put your Tesla founders shares in your ROTH IRA 15 years ago? I know my buddy Peter did..;-)

I literally didn't have a Roth account of any kind before this year.

In my prior retirement planning I didn't expect taxes to be significant. TSLA has changed that, now I'm adjusting my mindset going forward to look at both flexibility (avoiding RMDs, not eliminating them, just reducing my exposure to them) and taxability (moving some into Roth to split the taxes between now and later).

 

[MP3Mike]

It may be trivial but how do you pay the taxes on it? It's a taxed withdrawal which could be big depending on his personal situation.

This is going off-topic, but you could borrow against the shares you transferred out of your IRA to pay the tax if you didn't want to sell any shares and didn't have the cash to pay taxes. His point is that your are not forced to sell shares as part of the RMDs.

Not sure why I would do it though, would probably rather just sell in the tax advantaged account, move the $$ out, of course it is taxable income on the distributed amount, and then just re-invest the fresh $$ in either the same equity or other, or use some of the proceeds to pay the taxes due

The disadvantage of that, which could be an advantage, is that the stock could move considerably while you are waiting for the sale to settle, and then transferring the funds and them being available to reinvest. Withdrawing the shares directly avoids that issue entirely.

And for those of us with significant holdings, we wouldn't want to crash the TSLA stock price with our selling to comply with the huge RMDs.

 

[tivoboy]

It may be trivial but how do you pay the taxes on it? It's a taxed withdrawal which could be big depending on his personal situation.

Yes, and dont’ forget RMD’s are taxed as INCOME and not just capital gains taxes.. So, you could see at least 37% as a top rate, or higher. Say one has 5M in TSLA stock (I’m sure based on some surveys there are SOME folks in this group)… if a “majority” of their tax advantaged 401K or IRA is in TSLA, at 72 they are looking at nearly 500K in RMD based on current actuarial tables and tax law. That is a pretty big nut for EARNED INCOME rates.. I’d rather get as much out as possible EARLY, and get it into an after tax account where I know at least the current statutory limit Is closer to ~20% not including high earner premiums or state cap gains taxes (I’m talking to YOU CALIFORNIA, ILLINOIS, HI, NY, CT.!!!!!)

 

[MP3Mike]

Say one has 5M in TSLA stock (I’m sure based on some surveys there are SOME folks in this group)… if a “majority” of their tax advantaged 401K or IRA is in TSLA, at 72 they are looking at nearly 500K in RMD based on current actuarial tables and tax law.

Hmmm. The calculator I see says it is more like $182k.

Required Minimum Distribution Calculator | Investor.gov

Use our required minimum distribution (RMD) calculator to determine how much money you need to take out of your traditional IRA or 401(k) account this year.

www.investor.gov

 

[tivoboy]

I literally didn't have a Roth account of any kind before this year.

In my prior retirement planning I didn't expect taxes to be significant. TSLA has changed that, now I'm adjusting my mindset going forward to look at both flexibility (avoiding RMDs, not eliminating them, just reducing my exposure to them) and taxability (moving some into Roth to split the taxes between now and later).

I opened a ROTH for all my nieces and nephews by the time they were generating any income from Darry Queen/Starbucks/forever21 or wherever.. I gave them the money to fund it in the early years up to what they could contribute and told them, when they were really working that their first $$ had to go to a company sponsored 401K if it had a match or not and I’d put what they could into the ROTH. Once they were able to do it themselves, up to the point that they earned out due to earnings they had to pay themselves into the ROTH or I was going to SMACK them at Christmas!…I also said I would manage the investments… At this point, they get it. When we started, my niece was like “what is a Ross?” - of course that was during the Friends era.

Mod: feel free to delete at will, but it is Friday humour hour. ;-)

 

[tivoboy]

T

Hmmm. The calculator I see says it is more like $182k.

Required Minimum Distribution Calculator | Investor.gov

Use our required minimum distribution (RMD) calculator to determine how much money you need to take out of your traditional IRA or 401(k) account this year.

www.investor.gov

yes, that’s for someone 72 TODAY I assumed ppl were younger now and AT 72 they would have much higher RMD amounts. That’s some time in the future though. I just used a straight 5% growth to estimate future balance.

 

[traxila]

Yes, and dont’ forget RMD’s are taxed as INCOME and not just capital gains taxes.. So, you could see at least 37% as a top rate, or higher. Say one has 5M in TSLA stock (I’m sure based on some surveys there are SOME folks in this group)… if a “majority” of their tax advantaged 401K or IRA is in TSLA, at 72 they are looking at nearly 500K in RMD based on current actuarial tables and tax law. That is a pretty big nut for EARNED INCOME rates.. I’d rather get as much out as possible EARLY, and get it into an after tax account where I know at least the current statutory limit Is closer to ~20% not including high earner premiums or state cap gains taxes (I’m talking to YOU CALIFORNIA, ILLINOIS, HI, NY, CT.!!!!!)

Unfortunately the best answer is to move at some point. Or for at least 183 days of the year.

That is my plan. Have had a business in NYC that is not passive income (as in real estate which runs the town) and have been subjected to 60% taxes for the past twenty years or so. Once it clears 50% I get ornery.

 

[EVCollies]

Today I transferred my last big chunk of TSLA from IRA to Roth creating a large one time tax bill come 4/15/23. I hope to generate enough with option trading to pay the bill but as age > 59 1/2 I can pay with my Roth with 10% penalty.

What I tried to say was that you can pay the safe harbor estimated amount by Jan 18th this year and, then, if you need to pay more to cover all your taxes, you need to pay that remainder by April 15th. (I did write in my original post that the amount above the safe harbor estimated tax would be due April 15).

For example , if you paid X in taxes for 2020 and you need to pay 10X for 2021, then you can pay X (or 110% of X for high income filers) by Jan 18 and pay the remaining 9X (or 8.9X) by April 15.

Not tax advice—I’m sharing what I am learning as I go along and using this forum as a sounding board. So I appreciate your feedback @mongo.

It seems to me we are saying the same thing, but please correct me if I am wrong.

I'm willing to pay that penalty in April hoping I can make more than 10% having that cash for a bit longer...