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Financial Planning / Tax Strategies


Subject:  Re: Safe Harbor Rule Date:  8/9/2001  8:26 PM
Author:  lorenzo2 Number:  53215 of 127613

I have heard that there is a Safe Harbor Rule which allows you to delay paying taxes on capital gains for 16 months. However, I cannot seem to find any information on this. Can anyone assist?

The trouble with a large capital gain is that it may increase your tax liability to the point where you owe a penalty for having severely underpaid your taxes. However - if the total of your withholding, the amount applied from the previous year's return, and timely quarterly payments is at least as much as the previous year's tax liability (or 110% of the previous year's tax liability if your AGI exceeded $150K), then there will be no penalty. This number - 100% or 110% of last year's tax, according to your AGI - is called your Safe Harbor. The business about timely quarterly payments can be a problem. You have to have made them on time, and for the right amount. You can finesse this somewhat by using the annualized income method of Form 2210. You can also avoid a penalty by being with 90% of the actual tax due, though it's difficult to get that one right if your income is variable. And again, timely quarterly payments are necessary. You can actually wind up owing a penalty and getting a refund.

If you can increase your withholding sufficiently so as to cover the 100/110% Safe Harbor, then you're home free - forget quarterly payments. The IRS regards that payments via withholding are made uniformly throughout the year, even if in fact you loaded up your withholding in November and December!

As for the 16 month figure, I think that's a best case deal. For example, if you were to take a big capital gain in early January, you could effectively defer paying the tax on that gain for almost 16 months - that is, invoke the Safe Harbor above (to avoid penalties) and then pay the tax on April 15 of the following year - 15 1/2 months after the gain. But it really is a best case. If you take a gain at the very end of December, then you have only 3 1/2 months to pay the tax, by April 15 following.
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