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So picky, edcosoft. We're saying the same thing, I think. I did say the example was contrite--all I was trying to show was that although the tax year liability may be low, you may still owe penalty.

To be more precise (see my first post):
1) If your current tax liability minus your withholding is less than $1,000, then you don't have to file estimated tax, hence no penalty.

2) Otherwise, if there is income source other than your regular withholding job, you may have to file estimated tax.
You can file estimated tax by 4 options:
a) Pay one-lump sum on April 15
b) Pay in equal installment
c) Pay in unequal installment
d) Pay in unequal installment using the annualized income

3) If you pay in one-lump sum or in equal installment, you may add the estimated tax to your withholding to calculate your safe harbor (90% of this year tax or 100%/105% of last year tax). Otherwise, only withholding are used to calculate your safe harbor. If you don't reach the safe harbor, you owe penalty (the penalty is a simple interest of the amount underpaid for the length of time it was underpaid).

To calculate the penalty, you choose either #2c or #2d, whichever give the lower figure for underpayment of estimated tax, hence a lower penalty.

In other word, if someone have a huge capital gain in May & June, then a huge loss in December, and that person failed to pay estimated tax, then that person will owe penalty unless #1 or #2a/#2b happened and that person reached the safe harbor.

Yes, my contrite example isn't accurate. Decrease the capital loss on Dec 31 so that more than $1,000 is owed. Then #1 is satisfied and the safe harbor is reach because there's no withholding. Then the rest follow.

All I'm trying to say is that if you have capital gain, then you need to fill out the estimated tax when the gain occur. If you wait too long, you may owe penalty if you don't meet certain condition (e.g. the amount of tax owed or reaching safe harbor). If you do owe penalty, then use whatever method which give the lower penalty. Edcosoft, -- I might not be as clear as you, but I think we're trying to say the same thing, non?!?!
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