19 Nov Should I withhold extra tax after this home sale?
Q. I had the closing on my mother’s and father’s house in June 2021. It sold for about $170,000 more than it was appraised for in 2017. I did not live in the house. Should I have my employer take more federal tax out of my paycheck for the rest of the year to cover the tax? Someone said that if I don’t, I might have to pay more money to the IRS as a penalty in 2022 because the difference between the appraisal and the sale was so much higher.
— Still working
A. There are a few items to consider here.
First, because the house was not used by you as a principal residence, you are not entitled to exclude any portion of the gain realized upon sale.
But while your taxable income for 2021 will apparently be much higher than your 2020 taxable income, you may not need to increase your 2021 tax payments, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.
He said to avoid an underpayment of estimated tax penalty, a taxpayer needs to make tax payments that reach the lesser of a prior year “safe harbor” or a percentage of the current year tax. The rules differ slightly for federal and New Jersey taxes.
For federal purposes, one must pay the lesser of 100% of their prior year tax unless their adjusted gross income (AGI) exceeded $150,000 for those married filing jointly or $75,000 if married and filing separately, in which case the percentage is increased to 110% or 90% of their current year tax, he said.
For New Jersey purposes, it is the lesser of 100% of the prior year tax, regardless of the amount of prior year gross income, or 80% of the current year tax, he said.
“If your salary has increased in 2021 compared with 2020, and if your wages are your primary source of income aside from the capital gain from selling the house, you may end up not having to increase your tax payments as your 2021 withholding conceivably will exceed the 2020 thresholds,” Becourtney said. “If short, you could consider making fourth quarter estimated tax payments due January 18, 2022 to reduce the shortfall or, alternatively, pay the entire increased 2021 tax by April 15, 2022, the due date for your 2021 income tax returns.”
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This story was originally published on Nov. 19, 2021.
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