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Author: legm Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121351  
Subject: Underpayment of estimated tax Date: 10/19/1999 4:29 PM
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I want to send IRS an additional $3800 before the Janaury tax is due to avoid some of the penalty.
What kind of a message should accompany the check?
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Author: BladeXrunners One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19842 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/19/1999 6:03 PM
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I want to send IRS an additional $3800 before the Janaury tax is due to avoid some of the penalty.
What kind of a message should accompany the check?


That won't help. Underpayment penalty & interest is calculated per period (April 15, June 15, Sept 15, & Jan 18). If you had an underpayment for any period, then you owe penalty for that period. Paying more in a later period does not reduce nor cancel the penalty for the earlier period.

The second thing to note is that if you underpay in one period, you may owe penalty in subsequent periods even if you sent in the correct amount in the later periods. The reason is that any payment sent in is first applied to the previous underpayment, then what's left is applied to the current period. And since you only send in the "correct" amount, some of it will be applied to the previous period underpayment, thus leaving you with a lesser amount than required, hence triggering penalty for that period.

Your only chance to reduce the penalty is to annualize your income (a way of averaging your income). But this will only help you if most of your income is late in the year. For more detail, see IRA Publication 505.

The only way to avoid penalty to reach the "safe harbor" with withheld tax--this option only work if you worked for somebody who withhold tax for you. If you're truly self-employed, then you're out of luck.

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Author: RooCat Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19850 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/19/1999 7:20 PM
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Remember to send your check with a Form 1040ES for 1999 so it will be properly applied to your account.

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Author: legm Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19856 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/19/1999 8:36 PM
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This underpayment is the result of realized capital gains so if there is no way to avoid a penalty would it be allright just to wait until next April or should I add the extra amount in the Janaury payment? So far there is no way I can offset it with any more losses.

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Author: hghcpa Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19859 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/19/1999 8:50 PM
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This underpayment is the result of realized capital gains so if there is no way to avoid a penalty would it be allright just to wait until next April or should I add the extra amount in the Janaury payment? So far there is no way I can offset it with any more losses
=======


If the underpayment occured in the fourth quarter then you may be able to annualize the calculation and thereby make a fourth quarter payment without incurring a penalty. THIS IS A VERY COMPLICATED CALCULATION and you may want to consider the following alternative.

If you can have your withholding from your paycheck adjusted so that by the end of the year your federal tax withheld is greater than you prior year tax liability you could avoid any Est tax penalty..... assuming your AGI for 1999 is less than 150k.

Hope this helps

Pete




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Author: legm Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19861 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/19/1999 10:58 PM
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Well the underpayment did not occur in the fourth quarter, and there are no withholding taxes. Can you tell me how the penalty is figured?

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Author: BubblesUp One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19863 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/20/1999 12:01 AM
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>>legm wrote: This underpayment is the result of realized capital gains so if there is no way to avoid a penalty would it be allright just to wait until next April or should I add the extra amount in the Janaury payment? So far there is no way I can offset it with any more losses.

When did you sell the property that resulted in the capital gains? You may be eligible to use the "annualized income" method/worksheet to avoid underpayment penalties. Basic idea of this method is that if you had normal income for most of the year then a big income item (i.e. a big gain on a stock sale) late in the year, you don't get hammered for underpayment penalties since the big income came at year-end.

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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19864 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/20/1999 12:54 AM
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Unfortunately you do not give enough information to give you specific instructions, however, presuming you have no wages to withhold from, and have other income, and are probably already paying installments:
IF you pay in enough installments to equal last year's tax (or 105% if you had AGI over $150K last year) you own nothing until April and no penalty will be due, UNLESS you didn't pay equal installments, or one wasn't on time. In that case, you MAY owe a penalty, but there is nothing you can do about it now. It will work out when you figure the Form 2210, and due to the Gain, it will behoove you to complete the Schedule AI also (annualized income method),if the gain was in the later part of the year.
If you havn't paid enough per above, the sooner you make up the difference the better.
Your penalty is simple interest of 8% for the time the installment payment(s) is late, so paying an extra $3,800 now (presuming it was due on 9/15 or earlier and you owe it all to equal 1998 taxes with your other installment payments) will save you about $152 (.08 X .5 X 3,800), and 1/2 that if you pay it with your January installment. You probably don't owe it all, though.

The other poster's comments that it doesn't make any difference because your installments are on "periods" is only half applicable. The payment isn't due until a specific date, but the penalty only applies from that date until the date you pay it. He's right about
applying payments to past-due installment first, but that doesn't affect the amount of the penalty, it only makes you think you don't owe a penalty. Whenever it was due, you're stopping the interest from running when you pay the $3,800.

Sorry I couldn't give you better advice, but would have to know when the Gain occured, your other paid installments, last year's taxes, and maybe more.

Note that you may have overpaid earlier installments without knowing it because there are three "safe harbors" that could apply to each instalmment. Also, it will do you no good to pay total installments more than last year's taxes, or 90% of this year's taxes.
We publish a quarterly tax calculator on www.edcosoft.com that will compute all this for you for each installment when due, however, TurboTax will do it with your final return (retrospectively).
Ed


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Author: legm Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19866 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/20/1999 8:29 AM
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That is exactly the problem. The stock sales were made at various times starting in May, some more in July & August. I thouhgt taking some losses would offset them & now I think I've miscalculated.

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Author: RooCat Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19870 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/20/1999 10:48 AM
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I think the bottom line here is that the sooner you pay in estimated taxes that either equal 90% of what you expect to owe for 1999 or 100/110% of 1998 taxes, the sooner any penalties will stop running. Others have suggested various tax estimating programs you can utilize. This looks like the best idea to me. I wouldn't necessarily rely on the annualized income method exempting you from the potential penalties.

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Author: BladeXrunners One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19881 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/20/1999 4:27 PM
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I think the bottom line here is that the sooner you pay in estimated taxes that either equal 90% of what you expect to owe for 1999 or 100/110% of 1998 taxes, the sooner any penalties will stop running.

Not true.

You are exempted from paying estimated income tax only if the total amount on you tax return minus your withholding (estimated tax payment is not considered) is less than $1,000. Everybody else must make estimated tax payment.

The are 3 options when making estimated tax payment:
1) Make one lump-sum payment on April 15.
2) Make equal installment for each of the period (Jan 1 to Mar 31, Apr 1 to May 31, Jun 1 to Aug 31, Sep 1 to Dec 31).
3) Make unequal payment for each of the period.

For only option 1 & 2 are you entitled to the safe harbor if the estimated payment is 90% of the current year liability or 100%/105% of last year liability (the higher percentage is for those whose AGI is higher than $150,000, or $75,000 if filing MFS).

If you do option 3, the safe harbor is per period. The tax can be calculated per period or annualized. Per period means you're doing your tax for each period (i.e., you only consider income, deduction, credit, etc from only that period). Annualized means you're doing your tax from the beginning of the year to the current period.

Others have suggested various tax estimating programs you can utilize. This looks like the best idea to me. I wouldn't necessarily rely on the annualized income method exempting you from the potential penalties.

If your income is dramaticly different (for example, $0 in the first period, 90% in the last period), your required estimated payment is much less using the annualized method.

If you use the per period calculation, the required estimated payment is so much that you actually may overpay. And because the safe harbor is on a per period basis, even if your total estimated payment for the year may be more than you total tax liability for the year and you would still owe penalty because you failed to pay the required amount in each period. So the sooner you pay in estimated taxes that either equal 90% of what you expect to owe for 1999 or 100/110% of 1998 taxes, the sooner any penalties will stop running. is not true. Best for you is to do the calculation for each period--if you underpay earlier, the calculation will take that into account. In your interest, do both method and use the one where you owe the least amount. There is no easy way--simply paying 90% is not enough.

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Author: RooCat Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19894 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/20/1999 7:20 PM
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BladeXrunner: You missed my point. The poster felt they had already underpaid their estimated taxes due to the time frame of the sales (i.e 2nd and 3rd quarters). If there is still money due for the first 3 quarters, using either the annualized or per period method (90%/105%, whichever applies), the sooner the payment to correct this, the sooner the penalties stop running on the amount already underpaid.

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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19895 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/20/1999 7:57 PM
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RooCat said: BladeXrunner: You missed my point. The poster felt they had already underpaid their estimated
taxes due to the time frame of the sales (i.e 2nd and 3rd quarters). If there is still money due for
the first 3 quarters, using either the annualized or per period method (90%/105%, whichever
applies), the sooner the payment to correct this, the sooner the penalties stop running on the
amount already underpaid.


You're right Roo His tax liability was due on June 15 and Sept 15 and with no withholding there is no way to prevent a penalty. Paying now will stop the 8% simple interest penalty from running longer.

There are some posts on this subject from people who don't really understand the workings of Form 2210 and Schedule AI. The AI gives you credit in every quarter for any safe harbor AMOUNT that is applicable (except the $1,000 underpayment). There is only ONE way to figure it and tax estimators DON'T do it correctly. Quicken's Tax Planner even warns you it can't do it properly if you income varies much. You need a 2210 Calculator to do it correctly and the one on www.edcosoft.com is the only one that does it for ANY tax situation with 1999 rates (for less than $300, that is). Ed

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Author: legm Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19897 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/20/1999 9:36 PM
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edcosoft, I've no idea what you mean that I need a 2210 Calculator to do estimated taxes correctly. This is my very first experience of having underpaid estimated taxes & it was a fellow @H&R Block who told me I needed to send $3800 right now, which I did when I read your previous message. Now I would like to avoid this from happening next year. I do appreciate whatever help you can give me regarding this 2210 Calaulator.
legm(Lois)

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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19908 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/21/1999 4:55 PM
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edcosoft, I've no idea what you mean that I need a 2210 Calculator to do estimated taxes
correctly. This is my very first experience of having underpaid estimated taxes & it was a
fellow @H&R Block who told me I needed to send $3800 right now, which I did when I read
your previous message. Now I would like to avoid this from happening next year. I do
appreciate whatever help you can give me regarding this 2210 Calaulator.
legm(Lois)


Lois: I can't imagine your tax circumstances that you have no withholding and aren't paying installments already. Form 2210 and its Instructions explain underpaying and how to avoid it with Safe Harbors.

If you have sparodic trading profits like this, you need to be able to quickly know how much of an installment is due, and using the "estimator" approach leads to a lot of wrong assumptions, and the IRS Annualized Method worksheet is almost impossible to get right and could lead to some serious errors.

Therefor, we publish a 2210 calculator at www.edcosoft.com that will compute installments as they come due for (almost) ANY 1040 circumstances imaginable, including ISOs, AMT, hi-income phaseouts, Capital Loss Limitation, and while it's there, compute the Educational and Child Tax, and Student Loan Interest Credits automatically. These things are virtually impossible for a layman to "de-annualize" and then "annualize" and aren't on the IRS Worksheet, so naturally ours gets a bit "busy", but if you know your adjustments, we have a place to put it so it can be annualized.

When Annualizing on the 2210 Schedule AI you get credit for any "safe harbors" that apply in any quarter they apply, so you probably didn't owe as much installments as you thought, and even our program won't help you there for some circumstances until the year is over. However, if your 1998 taxes were less than $3,800 you didn't have to send more than your 1998 taxes . You'll still have a penalty, but paying more than you have to won't reduce it any more. Ed

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Author: legm Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19916 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/21/1999 8:31 PM
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Of course I've been paying installments--no withholding because husband is self employed & we're
very senior citizens besides. The accountant we had for many years died suddenly & left noone to replace him & I did not like the one I chose last year & since I had taken the H&R Block course a few years ago I went back to them for help because I suspected that I might be in trouble with capital gains that would amount to more than I took last year. However he looked over the situation & came up with this figure($3800) in 15 minutes. I understand that it does not relieve me of penalty, but he told me it would be a good thing to send the money & since you seemed to be saying the same thing I just did it.
Lois

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Author: upupaepops Big red star, 1000 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19982 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/24/1999 4:11 AM
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I don't have any expertise to offer, but I wonder if these ideas have any merit.

If increasing withholding could help some folks avoid a penalty, could it help Lois if she got some sort of job for the rest of the year, and arranged to have a lot of tax withheld? (Yes, I realize that they are very senior citizens.)

Also, since her husband is self-employed, couldn't he buy something needed in his work, and write it all off this year's taxes?

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Author: BladeXrunners One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20079 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/26/1999 4:15 PM
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If increasing withholding could help some folks avoid a penalty, could it help Lois if she got some sort of job for the rest of the year, and arranged to have a lot of tax withheld? (Yes, I realize that they are very senior citizens.)

It could help if that total withheld reach the safe harbor. Also note that most company won't withhold amount over a certain limit--for example, most company won't withhold your whole paycheck. With only 2 months left this years, it's doubtful this strategy will work.

Also, since her husband is self-employed, couldn't he buy something needed in his work, and write it all off this year's taxes?

Income & deductions are calculated per period, so this won't work. If you owe penalty for the previous period, there is nothing you can do to reduce those penalty. Of course, by paying the correct amount this period for this period tax & previous period underpayment, you won't be penalized this period.

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).

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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20095 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/27/1999 1:13 AM
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I beg to differ with you BladeXrunners. You said:

Income & deductions are calculated per period, so this won't
work. If you owe penalty for the previous period, there is nothing
you can do to reduce those penalty. Of course, by paying the
correct amount this period for this period tax & previous period
underpayment, you won't be penalized this period.

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).


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.

If you don't meet a safe harbor and have to file a Form 2210 note that your income is averaged, but you payments are as you paid them. Your withholding is normally averaged, but you can elect to apply it as withheld. Ed

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Author: BladeXrunners One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20115 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/27/1999 4:11 PM
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From BladeXrunners
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.

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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20130 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/27/1999 10:06 PM
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BladeXrunners:

I should have said, "you don't even have to do the AI to realize there's no penalty". I don't know why anyone would go out of their way to owe penalty on an AI if they are exempt otherwise, however, you said:

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.


and 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.


I don't know what you mean " by period" but if you just put the figures on page one of 2210 you'll see what I mean. You don't even need our Quarterly Installment Tax Calculator to do this. But specifically, the estimated tax is (in this case) in even installments of $0, or more specifically, of no concern. The safe harbor comes from deducting withholding from tax due and if you owe less than $1000 or it's more than 90%, you made it, or if you deduct it from last year's tax and it is less than $0 remaining, no penalty.

Even if there were uneven installments it doesn't keep you from satisfying a safe harbor, it's just that you can't use installments to satisfy a safe harbor that allows you to not even file a Forn 2210.

The 4 equal installments only allow you to meet the no penalty safe harbor at Line 18 without filling out the Regular Method of Form 2210, and if you fall short, figure the penalty on the Short Method. Ed



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Author: BladeXrunners One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20133 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/27/1999 11:16 PM
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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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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20148 of 121351
Subject: Re: Underpayment of estimated tax Date: 10/28/1999 2:14 PM
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Edcosoft, -- I might not be as clear as you, but I
think we're trying to say the same thing, non?!?!

We're doing better. "Safe Harbor" means different things to different people. Best step is to not have to file the 2210 at all. Next step is to be able to use the Short Method on page 1. Next step is to use the Regular Method and juggle withholding to minimize penalty. And the worst thing is to have to fill out the AI to reduce a penalty. That's why we publish our 2210 Calculator. You can end with no penalty on the Regular and AI Method, but still not meet a Page 1 "safe harbor". And you can pay uneven installments, and still meet a safe harbor to not have to file the 2210. The AI actually gives you credit for meeting a safe harbor (1/4 of last year's taxes, or 1/4 of 90% of this year's taxes) in each quarter although you don't meet it in other quarters. See Line 22 of AI for why you shouldn't pay any penalty, or installments in your example about using the AI. Also, I still don't understand what you're saying about "periods". Ed

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