Most professionals never pre-calculate their own taxes. Employer withholding makes the payments, and the annual return produces a small refund or a small balance. While this system works well for wages, withholding reflects the paycheck, not the portfolio. When income shifts toward stock sales, property sales, and K-1 distributions, the responsibility for estimating the bill moves to you.
2025 was my first full year of retirement, and my first tax year without W-2 income. I expected a lower tax bill and paid little in estimated taxes as a result. That expectation was wrong. I owed a significant tax bill.
These lessons apply before retirement as well. Anyone who sells appreciated stock, sells land, or invests in syndications while working faces the same two questions: how the IRS and the state will treat each transaction, and whether the year’s plan still fits the numbers. I made three errors that I should have caught.
I have filed an extension every year since 2019, because I do not receive all of my K-1s until well after April 15. In 2026, my last 2025 K-1 arrived at the end of July.
The IRS is clear an extension to file does not extend the time to pay, so any tax owed remains due by the regular deadline. In earlier years this never affected me, because withholding from my paychecks produced a refund. In 2025 no paycheck withholdings, I underestimated what I owed. The late payment generated significant penalties and fees.
What I Got Right
Parts of my plan worked as expected.
My overall income was lower this year because I wasn’t bringing in a paycheck. This was a pretty obvious win: reduce your income and your taxes go down.
My businesses incur reasonable expenses, and I expected those expenses to offset part of my portfolio income. They did. This strategy reduced my tax bill by approximately $7,500, which justified the additional bookkeeping and legal expenses.
Most of my income came from capital gains on the sale of stocks and a piece of land. As a result, my overall tax rate was lower than it would have been had the same income come from a job.
What I Got Wrong
I made three major mistakes in projecting my tax bill, however.
My stock portfolio covers part of my lifestyle, so I occasionally sell shares to keep sufficient reserves for my bills. My accounts are with Fidelity, which displays the basis for each holding on its website. That displayed basis does not include purchases made before January 1, 2012. When I sold a portion of my portfolio, the actual basis was significantly lower than the website indicated because they sold the oldest shares first. As a result, my capital gains came out almost double what I expected. You can argue whether I should have caught this before the 1099 was issued. I trusted the number on the screen and did not verify it. In the future, I will confirm the correct basis before estimating the tax effect of any sale.
My second mistake was I thought I was being clever, and I outsmarted myself. I sold a piece of land I no longer wanted to own and put the proceeds into a syndication. The land was a long-term timber investment. It produced no income and no longer fit my portfolio goals. A standard 1031 exchange would have deferred the capital gains. Unfortunately, standard exchanges align poorly with syndication investments because the ownership of the target property differs from the source of the funds. I chose a “lazy 1031” instead. In this approach, your share of the depreciation generated by the syndication offsets your gain. The net effect matches a standard exchange: taxes are deferred into the future through a different mechanism. My CPA confirmed that a lazy 1031 is a viable strategy in general. We did not review the specifics of my sale, and that gap is where the plan failed. A lazy 1031 works only when the property you sold appears on your Schedule E. The land produced no income, so it never appeared on my Schedule E. The sale went on my Schedule D as a long-term capital gain. The passive losses from the syndication could not offset that gain. All of it became taxable in 2025. This raised my total income considerably. My lesson here is that a professional’s general confirmation covers the strategy but a specific transaction requires its own review.
Finally, I had not looked closely at how Hawaii taxes capital gains. I assumed the rate would be reasonably low, potentially with multiple brackets as the federal system uses. That assumption was incorrect. Hawaii taxes all capital gains from the first dollar at a fixed rate of 7.25%. The state matches reduces that to your ordinary bracket when that rate is lower, which applies if you earn less than $38,400. In previous years, my state taxes were a fraction of my federal taxes. In 2025, they were almost as much as my federal taxes. Everyone should look up how their own state taxes capital gains, and other special sources of income, before selling an appreciated asset
Summary
Better planning would have helped in two ways.
First, I would have budgeted for the bill. The amount due was uncomfortably large, and it arrived as a surprise. Second, I would have made appropriate estimated tax payments and avoided the penalties and fees. Avoiding them would have reduced my overall tax liability by over 10%.
The IRS offers a defined target for these payments. A taxpayer generally avoids the underpayment penalty by paying at least 90% of the current year’s tax or 100% of the prior year’s tax. When prior-year adjusted gross income exceeds $150,000, the taxpayer pays the lower of 90% of the current year’s tax or 110% of the prior year’s tax. The prior-year test relies on a return you have already filed, so it requires no forecast of the current year’s income. Ask your CPA which test applies to you
My 2026 taxes are tracking well below 2025, because I am selling no property and my stock sales are minimal. Going forward I plan to:
- Validate each tax treatment against the specific transaction. Before any sale, confirm which schedule reports it, which bracket applies to the gain, how your state taxes it, and whether the basis being used is correct.
- Review the plan while changes remain possible. Review my tax plan at the start of the year, after each large sale, and again before the year ends. A plan reviewed in March can still change. A plan reviewed after the 1099 arrives cannot.
- When unsure, use a safe harbor target for estimated payments, and set aside cash for any remaining balance due.
The annual tax plan represents a decision as important as any investment you make. While it may seem like an administrative detail compared to choosing a deal, it fundamentally determines how much of your return you keep.
Strategies that work in general can still fail on specifics, as my land sale shows. The most reliable protection is a transaction-level review with your CPA before you act.
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This article is my opinion only, it is not legal, tax, or financial advice. Always do your own research and due diligence. Always consult your lawyer for legal advice, CPA for tax advice, and financial advisor for financial advice.