Q. As an Uber driver, I became part of the “gig” economy in 2019. An Uber veteran asked me if I had made any estimated income tax payments. She followed her question with a strong statement indicating these payments are required if penalty and interest were to be avoided. Please help me understand estimated income tax payments.
A. Many people earn money and have no income taxes withheld. “Gig” earners like yourself are self-employed along with a wide array of other folks who operate their own businesses, sole proprietorships or partnerships. Since income tax officials have seen the movie “Jerry Maguire,” they want you to “SHOW (or send) ME THE MONEY!”
Both federal and state governments have estimated income tax payment mandates that require taxpayers to predict their likely tax liability and make estimated payments on April 15, June 15, Sept. 15 and Jan. 15. Thus the next estimated tax payment for 2019 is due Wednesday.
Because of the peaks and valleys of earnings, the payments represent a taxpayer’s “guestimate” of what is owed. A “safe harbor” rule enables a taxpayer to avoid both penalty and interest. Succinctly, the “safe harbor” provides protection to a taxpayer if estimated payments add up to 90% of the tax shown on the individual’s current year Form 1040 or 100% of the tax reported on the prior year’s return.
We highly recommend you make a payment on or before Jan. 15 since the penalty provisions can be somewhat Draconian and the interest rates on underpayment of estimated taxes can fluctuate between 5% and 6% depending on the prime rate and other criteria.
Other taxpayers subject to the estimated tax payment rules include people who receive substantial dividends, interest and/or royalty income; report significant capital gains; or withdraw a Required Minimum Distribution (RMD) from their IRA or other pension plans. More details on estimated tax payments are available in IRS Publication 505-Tax Withholding and Estimated Tax.
Q. I was wondering about capital gains and losses when selling a vacation home. We purchased a Florida condo in 2005 and sold it at a huge loss in 2019. Can we recoup any of the loss through a tax credit or deduction? There was no mortgage involved.
A. The rules on capital gains and losses have more twists and turns than a Cirque du Soleil performance. We’ll cover the parts that apply to your case.
The IRS classifies your Florida vacation home as “personal use” property. That means if you have a gain when you sell, you can treat it (usually) as a capital gain. That’s the good news, since capital gains rates are normally lower than the rates on ordinary income.
The bad news is that a loss on personal use property is not deductible, nor does it qualify for any special tax breaks or credits. It’s one of those Maalox moments that often encourage taxpayers to seek professional counseling. We should add that things would be different if there were at least a partial-business-use component to the Florida property, such as renting to tenants, or conducting some type of commercial activity in or on the property.
Computing the amount of allowable loss could be a challenge. It would include the length of time you owned the property, the amount of depreciation taken before the sale, the percent of business use as opposed to personal use, and several other potentially mind-numbing factors.