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Subject:  Re: Two Related Tax Issues Date:  7/5/2008  2:56 PM
Author:  Opv1419 Number:  101264 of 127753

If your withholding this year will be a much as you paid ( or 110% of as much as you paid if your AGI was over $150K last year) in total taxes last year you don't need to pay ANY installments. Or, you could increase your withholding to meet this "Safe Harbor". Or, pay ONE installment to cover the difference for the first quarter where your gains make your current year's tax more than last year's tax (or 110%)

What you are suggesting in cumulative computing is called "Annualization" and is only advantageous if your current (cumulative) income level (and withholding) is lower than last year's tax (otherwise you would just pay 1/4 of last year's tax each quarter). You seem to be trying to cover the CURRENT year's tax increase due to the gain by Annualizing. You will end up paying considerable more than necessary. You should read the discourse in 1040ES and/or Publication 505, or even the discussion about estimated taxes on this and other boards. No spreadsheet will help you unless it actually computes the Annualized Income Method of IRS form 2210 and its Schedule AI.


I understand that part. Actually my spreadsheet does just that. I initially set it up just to facilitate the calculations on my tax returns each year. (I still am averse to to paying money each year for Turbo Tax or other specialized software.) I eventually expanded the worksheet to calculate projected additional taxes due as other unexpected (or hypothetical) income is factored into the equation. It makes the necessary comparisons to last year's taxes due as a part of the calculations. It gives me a bird's eye view at any point during the year so I can adjust my withholding, as needed, in order to come as close as possible to breaking even at the end of the year, without owing a penalty. It has worked well so far.

It is my understanding from the publications cited that taxes are due as one earns income throughout the year. Annualization is one way IRS allows us to accomplish that, i.e., paying incremental amounts either through regular withholding or through equal quarterly payments, etc, provided we pay (as you suggests) at least 100% (or 110%, as applicable) of the actual taxes due in the immediately preceding year. That fact notwithstanding, it is my understanding that paying taxes late on income earned in quarter one can still technically cause one to incur a penalty even if he ends the overall year being due a refund.
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