I am planning to trim some of my holdings in my taxable account. This will generate a considerable long term capital gains this year. These gains will be subject to a 15% tax rate. I expect the tax owed will be more than 2 times what was paid last year. I currently have taxes withheld from my job to cover my normal obligations. If I do nothing, I would send a very large check to the IRS and state at the time of filing taxes next year. I do not want to pay any penalties to the IRS. If it was regular income, I know there is a problem owing too much which would result in a penalty. Is there any difference between regular and long term capital gains? How does one give the IRS and the state their due and avoid penalties in this situation? TrainMaker
Check safe harbors for your state and federal. A federal safe harbor is based on withholding and estimated payments equal to (or for higher income 110%) of the previous years tax liability. Withholding is deemed to be even through the quarters while estimated payments aren’t. You can either make estimated payments or increase your withholding. I entering this on a phone and can’t post links.
Is there any difference between regular and long term capital gains?If by 'regular' you mean "ordinary income" - no, there's no difference from a penalty perspective. If you owe too much in taxes, be they ordinary income taxes or long term capital gains taxes, and you don't meet a safe harbor, the underpayment penalty will be the same.How does one give the IRS and the state their due and avoid penalties in this situation?You need to meet a safe harbor. For Federal taxes, one way is based on your last year's tax liability: If your AGI is less than $150k, then you need to pay withholdings and/or estimated taxes of at least your tax liability for last year. If your AGI will be more than $150k, then your withholdings and/or estimated tax payments need to be 110% of last year's tax liability.Another way is to end up owing less than $1000. The third way is to owe less than 10% of your total tax liability. Because these two ways are based on what you will owe, IMO, they are harder to ensure you will have enough withheld, so it's easier to base it on the prior year's tax liability.In your case, if your withholdings will not total up to 100% (110% if AGI > $150k) of last year's tax liability, you can fill out a new W-4 to have more taxes withheld for the rest of the year.Here's a tax topic from the IRS that should provide additional details https://www.irs.gov/taxtopics/tc306You will need to check with your state to see if they have underpayment penalties, and if they do, what the best way to avoid them is. I've paid taxes in some states where you just have to pay your total taxes by the due date of the return to avoid penalties, so you may not have to do anything this year.AJ
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