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Estimated tax payments
Old 07-08-2011, 07:30 AM   #1
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Estimated tax payments

I have a quck question about estimated tax payments. We have never had significant capital gains until this year (mostly from selling some long term individual stocks and moving the money immediately into total stock market index funds to diversify).

Last year we got back about $2500 in tax.

So far this year we have $12,500 in long term capital gains and $3800 in short term capital gains.

We probably pay about $35,000 a year in federal tax.

It is my understanding that there is no penalty if your withheld tax (from W2) is 90% of the amount of tax due? It looks like we should be ok so far without sending in a separate Sept. payment, but if we are bad and get a lot more short term capital gains we may be in danger?
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Old 07-08-2011, 07:58 AM   #2
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If you meet the 90% withholding level, you don't need to worry about IRS penalties. My only advice is to double check your withholdings and be sure you are pretty close to $35,000 by the end of the year.

In a quick eyeball of what you claimed to be your gains and my guess as to your marginal tax bracket, I have a comment on what your 2011taxes will be. If your withholding of last year are the same as this year, your capital gains taxes will eliminate any return. Things will be close to even.
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Old 07-08-2011, 08:01 AM   #3
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Depends on your income:

"There are three 'safe harbors' under which you can try to qualify to avoid penalties for underpaying estimated taxes:
  • 1. Pay at least 90% of the current year's tax liability through timely estimated tax payments;
  • 2. Pay an amount equal to at least 100% of last year's total tax bill through estimated tax payments this year; or
  • If you are a 'high income taxpayer,' pay an amount at least equal to the lesser of (1) 90% of this year's tax liability or (2) 110% of last year's tax liability. A high income taxpayer is one whose adjusted gross income on last year's tax return was over $150,000 ($75,000 for married individuals filing separately)."
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Old 07-08-2011, 09:07 AM   #4
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There is one more "safe harbor" provision, although it does not appear likely to apply to you.

If your total current year's tax liability minus your taxes withheld is less than $1,000 then you do not have to make any estimated tax payments.

I was first faced with estimated tax payments back in the late 1990s when my stock mutual funds began paying large cap gains distributions at the end of the year. Unlike you, I was already slightly under-withheld so I had to pay attention to this development. But I had a small window of opportunity to make those payments on time after their mid-December distributions and the estimated tax payment due dates in the middle of January.

You should also make sure to check for any estimated tax payments you need to make to your state. I had those to make, too. If you have to make those, you should try to make them before December 31st so you can deduct those payments on your federal tax return the following April instead of waiting another year. I learned that the hard way when I made that mistake the first year. After that, I would usually make the state estimated tax payment in late December and the federal one in early January.

The IRS website has the 1040-ES form and instructions. However, once I began making estimated tax paymetns I began to receive the form and instructions in the mail automatically each year.
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Old 07-08-2011, 09:50 AM   #5
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Another thing to consider is that the estimated tax payments effectively count towards those safe harbors only to the extent that they are paid in equal amounts each quarter. If you end up making no estimated tax payments the first two quarters and then a whole bunch in the last two, you'll have to figure your taxes separately for each quarter (PITA!) to show that the estimated tax sent in was sufficient to cover the tax due for each quarter. The way around this is that taxes withheld from paychecks are considered to be spread across the entire year. So it is better to have a bunch more withheld before the end of the year instead of making estimated tax payments, just to avoid having to calculate your taxes for each quarter.
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Old 07-08-2011, 07:27 PM   #6
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Thank you everyone for the advice!
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Old 07-08-2011, 07:45 PM   #7
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You should not need to make estimated tax payments. We never have.

Instead we have enough withheld from paychecks to cover our tax liability. This means we estimate our tax liability pretty carefully and adjust withholding. Usually we buy the latest copy of TurboTax over Thanksgiving and compute our taxes for the year that weekend. Then if need be, we adjust tax withholding in our last 3 paychecks (last in Nov, 2 in Dec). Sometimes we have to have the entire paycheck withheld for taxes.

The danger is that if we lose our jobs and don't have paychecks for December, we can mess things up. But an estimated tax payment in Jan of next year can solve some of that. Note that withholdings on a W2 are considered to be spaced evenly throughout the year even if they are not (as noted by Animorph). This avoids some of that "each quarter" math.
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Old 07-08-2011, 10:16 PM   #8
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Originally Posted by Animorph View Post
The way around this is that taxes withheld from paychecks are considered to be spread across the entire year.
Would taxes withheld from pension checks and reported on a 1099 also qualify for this treatment? (Some of us are free of those pesty paychecks and W2's!)
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Old 07-08-2011, 10:39 PM   #9
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Would taxes withheld from pension checks and reported on a 1099 also qualify for this treatment? (Some of us are free of those pesty paychecks and W2's!)
You bet it qualifies! (Sorry, could not resist.)
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Old 07-08-2011, 11:04 PM   #10
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You bet it qualifies! (Sorry, could not resist.)
Thanks. That's what I thought. We pay our fed taxes though a combination of pension withholding and est tax payments in about equal amounts. I've been assuming that if late in the year I determine that I'm significantly under-withheld, I'd simply up the pension withholding a bunch for the last quarter and avoid a penalty for both under-withholding and timing.
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Old 07-10-2011, 01:14 AM   #11
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Thank you everyone for the advice!
It'll take you less time to download, read, and plug through the form in the 1040ES instruction than it will to keep up with this thread...
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