Tax discussion, strategies and questions

[Knightshade]

That's exactly the safe haven to avoid underpayment penalties I mentioned earlier-

Your withholding and refundable credits will cover less than 90% of your tax liability for this year or 100% of your liability last year, whichever is smaller. (The threshold is 110% if your adjusted gross income last year was more than $150,000 for married couples filing jointly or $75,000 for singles.)



You're just doing it via quarterly payments instead of W4 normal withholding as someone who works a normal job then has a one-off unusual income event (the basic idea of the rule is not to screw someone who paid in similar to last year but then say sold a house for a big gain or something- but it also can be used the way you're doing it)

If it's "worth" making the quarterly payments to avoid the underpayment penalty will depend on your returns- in many cases you can beat the 0.5% per month interest the IRS charges on the underpayment by keeping the money in the market an extra year, but obviously that won't always be true for everyone.

 

[Buckminster]

If I choose to exercise my options, can I delay paying capital gains tax until I eventually sell the shares?

I'm in the UK but I assume it will be similar in most countries.

 

[Tslynk67]

If I choose to exercise my options, can I delay paying capital gains tax until I eventually sell the shares?

I'm in the UK but I assume it will be similar in most countries.

In all the postings here (and in options threads), this is indeed the case, I've not yet heard of a different rule for exercised options

 

[adiggs]

Yes, but there are a couple ways to avoid the penalty.

Estimated Taxes | Internal Revenue Service

My understanding is that one can avoid the underpayment penalty as long as the withholding was at least 100% of the prior year's taxes (safe harbor rule). I saw this detail in the link.

It is further my understanding that above some income level (I think $200k for married filing jointly) the withholding needs to be at least 110% of the previous year's taxes (rather than 100%). I DIDN'T see this additional detail at that link.


I could well be wrong. My own tax withholding has been based on this 110% understanding, rather than the 100% withholding.


This article does have information about the 110% safe harbor rule, with the threshold at $150k.
https://www.policygenius.com/taxes/a-guide-to-your-estimated-taxes/


My real point, me not being a tax professional in no way whatsoever, is to understand the safe harbor rule / withholding levels to make sure you don't come up short in the withholding.

As a bonus, paying 110% of this year's taxes due is an easy calculation to do, as well as to make estimated tax payments on.

 

[kengchang]

If anyone can answer this that would be great

Stock at 100
Sell 95 Put for $5 and Sell 105 Call for $5

Stock now trading at 120
95 Put expires worthless = $5 Gain
Roll 105 Call to to 110 Call next week for $15 Wash sale Loss

My questions is
Is the $5 Gain part of the trade thereby reducing $15 wash sale loss to $10
or
Is the $5 Gain realized and $15 wash sale loss

Thanks

 

[Causalien]

So anyway. 2020 is finally behind us. Took me many efforts but I've closed a large real estate transaction to be my new residence.

As a way to give back, I will tell you guys how this is structured so you guys can also benefit. Remember that this is in Canada, so some subtle differences.1. The equity is an asset based loan. Which currently has about 1.49% rate for 5 year terms. This is 0.10% above the actual rate due to risk. Not many period in history can you get this loan with such a low differential. Note also that this rate is pretty much impossible to get if you do not have a good relationship with your bank or if your credit score is bad. Most ppl will try to call their bank to get this, but will sit in queue for 2 hours before someone eventually hang up on you.

Then I took out a HELOC against this condo (yes smack middle in downtown core where covid fear ran rampant). And bought 25% rate reset preferred, another 25% in bank loan etf and 50% perpetual preferred + bond. This last move is not obvious. But here is why. Rate reset and bank loans usually move up as interest rate move up. Whereas perpetual preferred and bonds move up when interest rate goes down.You've now effectively hedge against interest rate movement. Be carefull though as these are freely traded on them arket, their face value is subject to buy and sell so do not behave as the theoretical value.

And as a last grace. The HELOC loan you took out to invest are tax deductible.

 

[LN1_Casey]

So this is the first year in which I sold stock and options on said stock, and thus the first year I'll have to file taxes on it.

Does anyone know how long it takes TD Ameritrade to generate the 1099? That's the form I need to file my taxes right? Their website says no later than the 15th of Feb, which seems a bit ridiculously late to me, as I typically have all my documents and file my taxes in late January or early Feb each year.

 

[ggr]

So this is the first year in which I sold stock and options on said stock, and thus the first year I'll have to file taxes on it.

Does anyone know how long it takes TD Ameritrade to generate the 1099? That's the form I need to file my taxes right? Their website says no later than the 15th of Feb, which seems a bit ridiculously late to me, as I typically have all my documents and file my taxes in late January or early Feb each year.

It's because of wash sale rules. You could sell a stock at a loss on Dec 31, then buy it back in late January, and that loss is disallowed.

Nice car! ;-)

 

[LN1_Casey]

It's because of wash sale rules. You could sell a stock at a loss on Dec 31, then buy it back in late January, and that loss is disallowed.

Nice car! ;-)

Thanks! I really like how it came out.

And that kind of sucks though for the wash rule. Makes sense, but I didn't sell any shares late December, so it's waiting for no reason on my end.

In OT, I saw a pearl pink Model 3 out here driving away from Honolulu when I was, ironically, picking mine up from being wrapped. Looked very much like your Model S color in your picture! Though not as impressive as a factory paint job, haha.

 

[Tim S]

I have a US tax question using hypothetical numbers...

My annual household income is normally $100,000. In 2020 I also made $200,000 in short-term capital gains, pushing me into a new tax bracket. I increased my paycheck withholding during 2020 but not nearly enough to cover all of my taxes. I got a refund when I filed my 2019 taxes, because my withholding was high enough in 2019.

My question is, will it help me to avoid or at least minimize interest and penalties to pay the IRS some estimated taxes before April 15th? Do I need to pay something by tomorrow, January 15th?

 

[LN1_Casey]

I have a US tax question using hypothetical numbers...

My annual household income is normally $100,000. In 2020 I also made $200,000 in short-term capital gains, pushing me into a new tax bracket. I increased my paycheck withholding during 2020 but not nearly enough to cover all of my taxes. I got a refund when I filed my 2019 taxes, because my withholding was high enough in 2019.

My question is, will it help me to avoid or at least minimize interest and penalties to pay the IRS some estimated taxes before April 15th? Do I need to pay something by tomorrow, January 15th?

Yes.

There is a calculator on IRS.gov for owed estimated taxes, and if you doubled (in theory) your income for the year, you'll owe a pretty penny in taxes for it, and they will fine you heavily for not paying on time. If you overpay, than you'll just get the cash back when you file for your year in April.

It's owed quarterly, as well. So if you made $50k in Q1, Q2, Q3, and Q4, than you're already delinquent for the Q1, 2, and 3 payments.

 

[MP3Mike]

I have a US tax question using hypothetical numbers...

My annual household income is normally $100,000. In 2020 I also made $200,000 in short-term capital gains, pushing me into a new tax bracket. I increased my paycheck withholding during 2020 but not nearly enough to cover all of my taxes. I got a refund when I filed my 2019 taxes, because my withholding was high enough in 2019.

My question is, will it help me to avoid or at least minimize interest and penalties to pay the IRS some estimated taxes before April 15th? Do I need to pay something by tomorrow, January 15th?

Look in to the IRS "Safe Harbor" rule. For example: Avoid Penalty For Underpaying Estimated Taxes | H&R Block

 

[kengchang]

I have a US tax question using hypothetical numbers...

My annual household income is normally $100,000. In 2020 I also made $200,000 in short-term capital gains, pushing me into a new tax bracket. I increased my paycheck withholding during 2020 but not nearly enough to cover all of my taxes. I got a refund when I filed my 2019 taxes, because my withholding was high enough in 2019.

My question is, will it help me to avoid or at least minimize interest and penalties to pay the IRS some estimated taxes before April 15th? Do I need to pay something by tomorrow, January 15th?

If you have already paid more than last year on tax withholding, nothing to worry about

 

[adiggs]

If you have already paid more than last year on tax withholding, nothing to worry about

This is also my understanding and is called the Safe Harbor rule (linked above).

The caveat / addition that I have is that the Safe Harbor rule changes above some income level. Below that level, withholding this year as much as you paid in taxes last year is good enough. I think that threshold is about $150k for married filing jointly (but I don't remember - be sure you know!)

Above that income level, you need to withhold 10% more than you paid last year in taxes.


I am not a tax professional / lawyer / accountant etc.. This is my understanding, but at least this has also informed my own decision making and actions (I've got skin in the game about being right on this; I can still be wrong - do your own due diligence). The link above is probably a good one. I found the IRS info on their site (easy to get to via web search) and got the info from them.

 

[Tim S]

Thanks for the help everyone! I think I am covered by the Safe Harbor rule.

 

[Tim S]

Since you were all so helpful, I have another question...

Last March 2020, I sold puts expiring this March 2021. They will clearly expire worthless ($100 and $140 strikes). At the time, I was thinking if I held them for a year it would be a long-term capital gain. I have since seen comments stating that if you sell an option, it will be a short-term gain or loss no matter how long you wait until you close it or it expires. Can anyone confirm that?

 

[kengchang]

Since you were all so helpful, I have another question...

Last March 2020, I sold puts expiring this March 2021. They will clearly expire worthless ($100 and $140 strikes). At the time, I was thinking if I held them for a year it would be a long-term capital gain. I have since seen comments stating that if you sell an option, it will be a short-term gain or loss no matter how long you wait until you close it or it expires. Can anyone confirm that?

Publication 550 (2019), Investment Income and Expenses | Internal Revenue Service (irs.gov)

 

[Tim S]

Publication 550 (2019), Investment Income and Expenses | Internal Revenue Service (irs.gov)

View attachment 627831

Thanks again! That's what I thought. Next time I will search for the answer myself

 

[Xepa777]

Question: I just got approval to WFH and I'm choosing Austin, TX as my official residence. Got a house, and am moving there beginning of February (currently live in California). Once I move in February, is there any documentation or anything to show that I'm officially a resident, or like some waiting period before I can sell my stocks and not pay California capital gains tax? Or can I immediately start selling shares then? lol.

 

[bkp_duke]

Question: I just got approval to WFH and I'm choosing Austin, TX as my official residence. Got a house, and am moving there beginning of February (currently live in California). Once I move in February, is there any documentation or anything to show that I'm officially a resident, or like some waiting period before I can sell my stocks and not pay California capital gains tax? Or can I immediately start selling shares then? lol.

Consult a CPA. Not trying to be rude, but seriously with big money involved, you want to cover your butt.

CA's "Franchise Tax Board" is notorious for coming after residents after they move for taxes they think are still owed to the state, so you want a WELL-DOCUMENTED paper trail with a professional should they come after you.


Not advice, but a friend that works for Tesla that is moving to Austin is going through something similar. By his report, if the stocks are part of options granted to you while you were a resident of CA, then you are obliged to pay CA income tax on them, even if you move out of state, because they are considered part of your "employee compensation" while in the state.

See how this gets murky quickly? Definitely get a CPA. A good one will pay for themselves many MANY times over, in short order.