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To avoid a penalty for underpayment, presuming your total income/tax will be higher in 2010 because of the options sale, be sure your withholding through April 15, 2010 and any installment you pay on April 15, 2010 total at least 1/4 of your 2009 total tax (1/4 of 110% of last year's tax if last year's AGI was over $150K). The same will apply for each subsequent quarter. You will probably owe considerable tax to pay in April 2011, but no penalty. In other words: You don't have to pay the tax when you get the income, and you can spread it out and defer it considerably.

The installments are due April 15, June 15, September 15 and January 15. Note the "quarters" are not all 3 months long and the first quarter contains 3 1/2 months of withholding so your first quarter installment might be less than subsequent quarters because it contains more withholding (3 1/2 months), and the second quarter only contains 2 months of withholding so that quarter's instalment will be more. Note this works to your advantage and is an option instead of considering withholding averaged evenly across all 4 quarters.

Due to the surge in income in the first quarter, and presuming your regular income continues, since your tax will be higher than last year and most of your income comes in the first quarter, the other "safe harbors" are not likly to help you (that is, paying the least amount necessary during 2010 to avoid a penalty).

Get IRS form 2210 to see how this works.

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