Settle a debate (tax-related)

[goldengirlz]

We always owe money each year in April. I remember reading on this board that it’s okay to owe — but I can’t remember why. Our other options are 1) pay quarterly or 2) try to guess how much we’ll owe and have that withheld

Anyway. H and I don’t agree on what to do. WWYD?

[hocus2]

The thinking on owing it about not giving the government an interest free loan.

Lets say you get 1000 refund each year. Getting over 12 months means you could have invested all long and gained more return on it.
On the flip side if you own 1000 each year you've largely lost nothing.

However if you pay a penalty each year I think you're possible "losing" more than would if you just overpaid and got a refund.

[puppylove64]

I think the idea is to cut is as close to owing $0 as possible. I would not want to pay penalties. You should probably make quarterly payments

[konapoppy]

You should pay quarterly.

[minzy]

I don’t know the answer, but I’m the lower earner and withhold extra from my paycheck to try to make a dent in what extra my husband will owe. TBD how effective that’s been…

[Mushe]

I have extra withheld from each check because we always owed and were having to pay penalties. I’m straight salary, but H has stock and bonuses so it’s hard to predict. Sometimes (often) we still owe, but it’s close enough that we don’t pay a penalty. I literally just took the amount we owed one year and divided it by 12, and do a small adjustment annually.

I do our taxes and I take immense pleasure in how close I was able to predict our final liability! We usually end up right around net zero, but the most we’ve fluctuated was $1k.

[sandandsea]

Make sure you pay at least 90% of your total tax due for the year, or 100% of last years tax to avoid the penalty (100% if high earner). Also you may be able to ask your company to withhold a higher percentage on the rsus.

[ohgillian]

Jan 5, 2022 19:44:31 GMT -5 goldengirlz said:

We always owe money each year in April — my total comp (half of which is paid in stock/RSUs) is painfully under-taxed. The amount we owe is usually in the low- to mid-five figures, so it’s not a fun check to write. And we pay a penalty.

I remember reading on this board that it’s okay to owe — but I can’t remember why. Our other options are 1) pay quarterly or 2) try to guess how much we’ll owe and have that withheld (we’ve already adjusted all the withholdings we possibly can on our W4s. It doesn’t matter because RSUs are taxed at a flat rate, regardless of tax bracket.) The tricky part is that the value of my RSUs is always kind of a mystery, since it depends on our stock performance.

Anyway. H and I don’t agree on what to do. WWYD?

You may know this but in addition to changing your withholding exemptions (eg. to zero), you can also elect to have additional flat amounts withheld each paycheck. This is what I do. I don't have the complicated situation you have, but withholding at single/zero always leaves me with a big tax bill, so I have a few hundred a month withheld on top of what the W4 would suggest. 

[goldengirlz]

Jan 5, 2022 20:35:24 GMT -5 konapoppy said:

You should pay quarterly.

How do deductions work when you pay quarterly? Do we have to get quarterly tax statements from our mortgage lender, for example? We itemize and use tax software to calculate everything. Is this is a case where we should just pay someone to do our taxes for us?

[sadlebred]

I'd pay quarterly.

I usually get a small refund. I claim 0 deductions and have a flat amount taken out of each paycheck.

[konapoppy]

Jan 6, 2022 11:03:22 GMT -5 goldengirlz said:

Jan 5, 2022 20:35:24 GMT -5 konapoppy said:

You should pay quarterly.

How do deductions work when you pay quarterly? Do we have to get quarterly tax statements from our mortgage lender, for example? We itemize and use tax software to calculate everything. Is this is a case where we should just pay someone to do our taxes for us?

I think it is estimated - and a quick google search looked like turbo tax may do this. I am entirely ill equipped to answer this. Here is the IRS site:
www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

[orval]

Estimated taxes are simply a payment on your taxes so you don't owe as much or face an underpayment penalty. You basically write a check to the IRS. There are payment coupons 1040es to use. It does not affect any deductions -- you file those the same on your tax return.

This link has good answers.

www.irs.gov/faqs/estimated-tax

This is a worksheet that can help estimate what you might owe. www.irs.gov/pub/irs-pdf/f1040es.pdf

[goldengirlz]

Thanks everyone! H wins this round. 🙂 We’ll start paying quarterly or try to withhold an additional amount.

[ny96]

We have the same argument going in my house, only my husband is the one who wants to make payments and doesn’t take any initiative to actually do it, so it drives me crazy when he brings it up every couple months.

[awkwardpenguin]

I'm sure you've already checked this angle, but DW's employer allows her to set her RSU withholding rate instead of using the 22% supplemental comp rate. We withheld at our marginal tax rate, which actually overwithheld overall and we're getting a refund.

When we thought we were going to have to do estimated quarterly payments, our plan was "pay an accountant to figure out the amount".

[melmel48]

Pay quarterly

[jwright]

I’m going to go against the grain and say you don’t need to pay quarterly. I have sort of unknowable income from business investments and don’t adjust my payments quarterly.

The penalty is .5% per month plus 3% interest. If you receive RSUs at the end of the year then the payment isn’t due until the fourth quarter. You can enter that information on Form 2210 to show how your income is annualized. If you owed 20,000 in the fourth quarter that’s $100/month penalty. Most of my clients would rather use their cash in other ways than paying the IRS early. If you were the type to pay a professional to calculate your estimates, you’d spend more on the CPA’s bill.

[awkwardpenguin]

Jan 6, 2022 14:45:05 GMT -5 jwright said:

I’m going to go against the grain and say you don’t need to pay quarterly. I have sort of unknowable income from business investments and don’t adjust my payments quarterly.

The penalty is .5% per month plus 3% interest. If you receive RSUs at the end of the year then the payment isn’t due until the fourth quarter. You can enter that information on Form 2210 to show how your income is annualized. If you owed 20,000 in the fourth quarter that’s $100/month penalty. Most of my clients would rather use their cash in other ways than paying the IRS early. If you were the type to pay a professional to calculate your estimates, you’d spend more on the CPA’s bill.

Most RSU comp vests quarterly after the initial grant, and in our case it's about 60% of our total compensation for the year.  So it could easily be four figures in penalties if we had to withhold at 22% and didn't do any other adjustments.  So it depends a lot on the situation.

[awkwardpenguin]

Although a happy medium might just be to take last year's tax bill, divide by the number of paychecks, and withhold that much from your check on the "additional withholding" line.

[jwright]

Jan 6, 2022 14:59:05 GMT -5 awkwardpenguin said:

Jan 6, 2022 14:45:05 GMT -5 jwright said:

I’m going to go against the grain and say you don’t need to pay quarterly. I have sort of unknowable income from business investments and don’t adjust my payments quarterly.

The penalty is .5% per month plus 3% interest. If you receive RSUs at the end of the year then the payment isn’t due until the fourth quarter. You can enter that information on Form 2210 to show how your income is annualized. If you owed 20,000 in the fourth quarter that’s $100/month penalty. Most of my clients would rather use their cash in other ways than paying the IRS early. If you were the type to pay a professional to calculate your estimates, you’d spend more on the CPA’s bill.

Most RSU comp vests quarterly after the initial grant, and in our case it's about 60% of our total compensation for the year.  So it could easily be four figures in penalties if we had to withhold at 22% and didn't do any other adjustments.  So it depends a lot on the situation.

Right, but there’s an opportunity cost to parting with your cash early that’s probably more than .5% per month. I use distributions to pay my taxes and leaving it in the funds/businesses over the course of the year earns more.

[awkwardpenguin]

Jan 6, 2022 15:03:15 GMT -5 jwright said:

Jan 6, 2022 14:59:05 GMT -5 awkwardpenguin said:

Most RSU comp vests quarterly after the initial grant, and in our case it's about 60% of our total compensation for the year.  So it could easily be four figures in penalties if we had to withhold at 22% and didn't do any other adjustments.  So it depends a lot on the situation.

Right, but there’s an opportunity cost to parting with your cash early that’s probably more than .5% per month. I use distributions to pay my taxes and leaving it in the funds/businesses over the course of the year earns more.

Yeah, I get that.  It's all sort of rounding error in either direction with the kind of tax bills we're talking.

[goldengirlz]

I am on a quarterly vesting schedule but it’s a good point about the cost of a CPA vs. the penalty. OTOH, I don’t see a downside to withholding an extra $1500 each month. We might still owe, but we’d be closer and pay a smaller penalty.

[niq]

Jan 5, 2022 19:44:31 GMT -5 goldengirlz said:

We always owe money each year in April — my total comp (half of which is paid in stock/RSUs) is painfully under-taxed. The amount we owe is usually in the low- to mid-five figures, so it’s not a fun check to write. And we pay a penalty.

I remember reading on this board that it’s okay to owe — but I can’t remember why. Our other options are 1) pay quarterly or 2) try to guess how much we’ll owe and have that withheld (we’ve already adjusted all the withholdings we possibly can on our W4s. It doesn’t matter because RSUs are taxed at a flat rate, regardless of tax bracket.) The tricky part is that the value of my RSUs is always kind of a mystery, since it depends on our stock performance.

Anyway. H and I don’t agree on what to do. WWYD?

We are always in this boat for the exact same reason. For cash flow reasons we can't raise our W4 withholding either.

What we do is take whatever the total (pre-tax) amount vested and pay 10% of that quarterly, plus 15% of cap gains from any sales that quarter. We try to only sell RSUs once a year. It takes about half an hour.

I would also ask your employer(s) Stock Plan Services if they can work with the brokerage to let you change the sell to cover/withhold percentage. I have worked at 3 companies and 2 of them let you do this.

In our situation, only about 20-25% of our AGI is stock-based compensation vesting (EDIT, I just saw that stock is 50% of your comp; yes I would think the penalties there are enough I'd be mad about paying them). The underwithholding penalties are not that high, in fact it's generally so little that it's not worth hiring an accountant to do your quarterly taxes until you get close to Fuck You Money. But I just turn quarterly* tax day into a money-do day and do things like rebalance the portfolio.

*The due dates are not actually quarterly! WTF!

[niq]

Oh I forgot the other option ... the childless coworkers on my company's personal finance slack channel wait until September or October and then use the IRS withholding calculator and adjust their W4s. This lets them get a pretty exact withholding without an accountant. But then they have to change it back at the start of the next year. Parents mostly don't do this because cash flow issues (Christmas, child care, summer camp, etc.)

Personally I find this a more tedious calculation than "pay the IRS another 10% every quarter". Changing sell to cover withholding is definitely the simplest.

[audry80]

We have the same situation with my H salary and we make a large payment during the year. The only reason why is to prevent from being fined for under withholding.

[sdlaura]

We’re also in high tax CA. DH and I both claim 0 dependents (despite having four kids) and that we are single, in order to have the max withheld. And then we still make quarterly payments.

The idea with trying to not get a big refund is time value of money - if you keep more and invest it/saved it back in the days when interest rates were higher, you came out better off. But we prefer to not owe too much/risk being penalized.