Message Font: Serif | Sans-Serif

No. of Recommendations: 0
Here's a contrite example. On Jan 01, you have \$30k in capital gain. On Apr 01, you have \$30k in capital gain. On Aug 01, you have \$30k in capital gain. On Dec 31, you have \$90k in capital lost. So your tax liability for the year is \$0. However, you still owe penalty because you didn't pay estimated tax for the first 3 periods. (Tax is a pay-as-you-go).

From edcosof
However, that \$0 liability is spread evenly over the 4 quarters using the Regular Method so there is no penalty. Even if you do the AI Annualized Method, there's no penalty because this year's tax is \$0 and your withholding was obviously enough to cover 90% of that.

Picky, picky. Fine. Assume that on Dec 31, you have \$89,999.00 in capital loss. Then your tax liability for the year is \$0.15 (assuming no deduction nor exemption, etc).

Because there is tax due, you can't use the Regular Method of equal installment payment of \$0 each. Hence, you're force to either use the uneven payment or the annualized payment. In both case, you would be penalized.

If you do the Annualized Method, your annualized income for each periods is \$120k (\$30 * 4); \$144k (\$60 * 2.4); \$135k (\$90 * 1.5); & \$0 (\$0 * 1). Thus, the estimated tax owed (for simplicity, assume no deduction nor exemption) per periods is \$6,408.45; \$9,756.45; \$6,199.20; & \$0. Your tax liability for the whole year is only \$0.15. But because you failed to make the estimated tax payment for each period, you will owe \$819.10 in underpayment penalty!!!

Even if you do the AI Annualized Method, there's no penalty because this year's tax is \$0 and your withholding was obviously enough to cover 90% of that.

You may only consider 90% of the tax for safe harbor for the <whole> year if the estimated tax is in even installment or in one-lump sum on the previous April 15. For all other situation, it is per period. So in the above example, the IRS will disagree with edcosoft--if you use the AI Annualized Method, there will be a penalty regardless of what the year tax is.

Announcements

Disclaimer:
In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.