Estimated Taxes

Most Brooklyn Fi clients will need to pay extra taxes throughout the year due to exciting and often life-changing events such as their company going public.

Paying taxes is not fun so our unique approach is guided by these core principles.

Brooklyn Fi guiding principles for estimated tax payments

  1. Avoid underpayment and late payment penalties.

  2. Adjust paycheck withholding as much as possible and pay additional taxes quarterly.

  3. Pay estimated taxes directly to the IRS and your state after a large taxable event. Here’s a step-by-step guide.

  4. Overpayments in one tax year are carried forward to the next year to cover the Q1 payment (i.e. no refunds). We may artificially generate a large refund in order to jumpstart your Q1 payment for the following year.

Brooklyn Fi Rules for estimated tax payments

  1. We use the combination of withholding the right amount via your paycheck (110% of the total tax you owed last year) and saving proceeds from large sales to get close to an estimate of your tax liability. In our annual year-end tax planning meeting, we’ll look at what actually happened during the year and project your actual tax bill. We may have you make an estimated payment at this point (the Q4 payment is due Jan 15th) or just continue to hold onto the “Taxes” savings.

  2. We have you pay estimates. If you don’t have a paycheck (you’re self-employed or not working at the moment) or the liability is too large (i.e. you paid $1,000,000 in taxes last year and your salary is only $200,000), OR you need your whole paycheck to cover living expenses then the W4 strategy won’t work. In that case, you’ll receive a quarterly reminder email to make those payments 10 days ahead of time. Those payments are due: April 15th, June 15th, September 15th, and January 15th.

  3. We specially allocate your income. For example: if you sold $1,000,000 of stock in your company in November, we would allocate that income to the 4th quarter to ensure the IRS does not levy underpayment penalties. The same goes for moving across state lines.

  4. On large stock sales or liquidity events, we provide estimated amounts to pay in throughout the year. For example, if you sell $100,000 worth of shares in your company and those shares were ISOs but you didn’t meet the holding period (that’s a Disqualifying Disposition), we would recommend you save 37% + 13% or $37,000 + $13,000 to pay the tax bill. We recommend you pay those estimates immediately to the IRS and your state. Here’s a step-by-step guide. We have provided these estimated rates below, please ask your planner for specific state rates if you don’t live in New York or California.

 
 

Special Cases

  1. When you move across state lines, you will likely need to start paying taxes immediately in your new state on your current income. It’s possible your employer will not allow you to change your state withholding. You should look up your state’s department of revenue and pay your new estimated taxes online. Your financial planner can help you calculate those liabilities.

  2. The rules around exercising and selling stock options are murky when it comes to moving across state lines. We’ll review each situation individually and help you understand the tax consequences. We will likely recommend you speak with a tax attorney if you are being taxed in multiple jurisdictions.