From BladeXrunnersHere'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 edcosofHowever, 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.
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