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When selling an equity, one has to pay the estimated taxes on any capital gain realized from that sale by filing a 1040ES tax estimate with the IRS for the appropriate quarter during which the gain was earned. I understand the reason for that, as taxes on earnings are due when they are earned during the year. My questions pertaining to estimated taxes are these:

First, in the case of the first, second and third quarters, the forms for the quarterly tax estimates have due dates that fall before the actual end of the last day of those quarters. Taxes due for the quarter ending June 30, for example, are due somewhere around June 15. I didn't decide to sell one of my equities until June 30. Taxes on that gain were already LATE on the day the gain was realized. Is there a penalty due if I submit the form and pay the tax on that capital gain along with any gain for the quarter ending September 30?

Second, If I sell more than one equity, one having a capital gain and one with an offsetting capital loss which, resulting in an overall slight loss, are the estimated taxes on the gain portion still due for the quarter in which the gain was realized? My initial thought was to assume not, seeing that there was no actual overall gain. However, as screwed up as the IRS is, my second thought was they just might require me to pay it so they can give it back to me next April.

Thanks,
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which the gain was earned. I understand the reason for that, as taxes on earnings are due when they are earned during the year. My questions pertaining to estimated taxes are these:

First, in the case of the first, second and third quarters, the forms for the quarterly tax estimates have due dates that fall before the actual end of the last day of those quartersTaxes due for the quarter ending June 30, for example, are due somewhere around June 15. I didn't decide to sell one of my equities until June 30. Taxes on that gain were already LATE on the day the gain was realized. Is there a penalty due if I submit the form and pay the tax on that capital gain along with any gain for the quarter ending September 30?.


No, they don't. Tax "quarters" are not calendar quarters. Tax "quarters" end on 3/31, 5/31. 8/31. ans 12/31. Your 6/30 stock sale is in the third quarter.

Second, If I sell more than one equity, one having a capital gain and one with an offsetting capital loss which, resulting in an overall slight loss, are the estimated taxes on the gain portion still due for the quarter in which the gain was realized? My initial thought was to assume not, seeing that there was no actual overall gain. However, as screwed up as the IRS is, my second thought

Estimated taxes are not necessarily due on a gain in the quarter sold. Your estimated tax liability at any point in time is based on your total income, not any specific transaction. Additionally, there are a number of safe harbor provisions that may allow you to pay far less in estimated taxes than your final liability for the year (with the balance paid on 4/15 with your tax return). There are a number of estimated tax calculators available that will determine the minimum estimated tax payment for your specific circumstances. Edcosoft, who often posts here, has one of the better ones.

Ira
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No, they don't. Tax "quarters" are not calendar quarters. Tax "quarters" end on 3/31, 5/31. 8/31. ans 12/31. Your 6/30 stock sale is in the third quarter.

Thanks. Very helpful.

Estimated taxes are not necessarily due on a gain in the quarter sold. Your estimated tax liability at any point in time is based on your total income, not any specific transaction. Additionally, there are a number of safe harbor provisions that may allow you to pay far less in estimated taxes than your final liability for the year (with the balance paid on 4/15 with your tax return). There are a number of estimated tax calculators available that will determine the minimum estimated tax payment for your specific circumstances. Edcosoft, who often posts here, has one of the better ones.

So rather than owing taxes, per se, on the specific LTCG, it sounds like I would have to look at cumulative total income for each quarter and just assess whether taxes through regular withholding are sufficient to cover any gain realized. To the extent there are residual taxes due, I presume that would be the amount I would need to pay on the quarterly tax estimate. Otherwise, I presume no additional taxes would be due. Makes sense. I have an Excel spreadsheet that will likely help me in that regard.

Thanks for your help.
Thanks
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So rather than owing taxes, per se, on the specific LTCG, it sounds like I would have to look at cumulative total income for each quarter and just assess whether taxes through regular withholding are sufficient to cover any gain realized. To the extent there are residual taxes due, I presume that would be the amount I would need to pay on the quarterly tax estimate. Otherwise, I presume no additional taxes would be due. Makes sense. I have an Excel spreadsheet that will likely help me in that regard.

If your withholding this year will be a much as you paid ( or 110% of as much as you paid if your AGI was over $150K last year) in total taxes last year you don't need to pay ANY installments. Or, you could increase your withholding to meet this "Safe Harbor". Or, pay ONE installment to cover the difference for the first quarter where your gains make your current year's tax more than last year's tax (or 110%)

What you are suggesting in cumulative computing is called "Annualization" and is only advantageous if your current (cumulative) income level (and withholding) is lower than last year's tax (otherwise you would just pay 1/4 of last year's tax each quarter). You seem to be trying to cover the CURRENT year's tax increase due to the gain by Annualizing. You will end up paying considerable more than necessary. You should read the discourse in 1040ES and/or Publication 505, or even the discussion about estimated taxes on this and other boards. No spreadsheet will help you unless it actually computes the Annualized Income Method of IRS form 2210 and its Schedule AI.

ed
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If your withholding this year will be a much as you paid ( or 110% of as much as you paid if your AGI was over $150K last year) in total taxes last year you don't need to pay ANY installments. Or, you could increase your withholding to meet this "Safe Harbor". Or, pay ONE installment to cover the difference for the first quarter where your gains make your current year's tax more than last year's tax (or 110%)

What you are suggesting in cumulative computing is called "Annualization" and is only advantageous if your current (cumulative) income level (and withholding) is lower than last year's tax (otherwise you would just pay 1/4 of last year's tax each quarter). You seem to be trying to cover the CURRENT year's tax increase due to the gain by Annualizing. You will end up paying considerable more than necessary. You should read the discourse in 1040ES and/or Publication 505, or even the discussion about estimated taxes on this and other boards. No spreadsheet will help you unless it actually computes the Annualized Income Method of IRS form 2210 and its Schedule AI.

ed


I understand that part. Actually my spreadsheet does just that. I initially set it up just to facilitate the calculations on my tax returns each year. (I still am averse to to paying money each year for Turbo Tax or other specialized software.) I eventually expanded the worksheet to calculate projected additional taxes due as other unexpected (or hypothetical) income is factored into the equation. It makes the necessary comparisons to last year's taxes due as a part of the calculations. It gives me a bird's eye view at any point during the year so I can adjust my withholding, as needed, in order to come as close as possible to breaking even at the end of the year, without owing a penalty. It has worked well so far.

It is my understanding from the publications cited that taxes are due as one earns income throughout the year. Annualization is one way IRS allows us to accomplish that, i.e., paying incremental amounts either through regular withholding or through equal quarterly payments, etc, provided we pay (as you suggests) at least 100% (or 110%, as applicable) of the actual taxes due in the immediately preceding year. That fact notwithstanding, it is my understanding that paying taxes late on income earned in quarter one can still technically cause one to incur a penalty even if he ends the overall year being due a refund.
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That fact notwithstanding, it is my understanding that paying taxes late on income earned in quarter one can still technically cause one to incur a penalty even if he ends the overall year being due a refund. .

Obviously you'll incur a penalty if you're late paying the amount due under any safe harbor (including the AI) method.

But not if each on time payment is at least 1/4 of last year's tax, or (if lower) the tax due for that quarter on the Annualized Income Method. With your method it could easily happen when you have a large gain in the 2nd or later quarter. If you had truly Annualized this wouldn't happen, and usually annualizing with your return will eliminate the supposed error, but, unfortunately, after the year's over most people can't reconnstruct their records on a tax quarter basis, and the computations are daunting, and even worse if one is subject to the AMT and phaseouts.

The chief advantage to Annualizing (in advance) is not to pay less for the year, because you will owe either the amount of last year's tax, or 90% of the full current years tax for your full year of withholding and estimates regardless, but its big plus is its ability to lower initial quarters' installments to less than either safe harbor, and calculate how much to adjust later installments to prevent a penalty.

ed
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Obviously you'll incur a penalty if you're late paying the amount due under any safe harbor (including the AI) method.

But not if each on time payment is at least 1/4 of last year's tax, or (if lower) the tax due for that quarter on the Annualized Income Method. With your method it could easily happen when you have a large gain in the 2nd or later quarter. If you had truly Annualized this wouldn't happen, and usually annualizing with your return will eliminate the supposed error, but, unfortunately, after the year's over most people can't reconnstruct their records on a tax quarter basis, and the computations are daunting, and even worse if one is subject to the AMT and phaseouts.

The chief advantage to Annualizing (in advance) is not to pay less for the year, because you will owe either the amount of last year's tax, or 90% of the full current years tax for your full year of withholding and estimates regardless, but its big plus is its ability to lower initial quarters' installments to less than either safe harbor, and calculate how much to adjust later installments to prevent a penalty.

ed


Very true. Thanks for pointing that out. What I am doing may not be annualizing in the strictest definitional sense. Typically all of my normal income taxes are paid monthly through withholding on my pension. I have a cushion built in to that so that I can earn a nominal amount of additional funds, interest, dividend income and other anticipated sources, in an attempt to break even at the end of the year. I don't include in that cushion the anticipate sale of equities, as I typically buy and hold long term. My recent sale was the first one I have sold in ages. I, therefore, rarely ever have to resort to a quarterly tax payment.

After reading your response, I may have been confusing the fact that I might owe additional taxes for the year with the penalty that may or may not be applicable. Whether I am accomplishing my objective of avoiding a penalty by design or by accident, so far my spreadsheet has kept me out of trouble.

I think I am clear on the when question as far as the additional taxes due on the sale of my equity. Since you have graciously elaborated on the penalty aspect, I think I am also clear on that. Your explanation is consistent with what I have read on the topic. Since I don't meet the criteria for the 110% rule to apply, I think I am safe so long as I pay timely either 100% of last year's actual tax due OR 90% of the actual taxes due for the current year.

Thanks again for your help.
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Might I add one additional follow-up question, just to make sure I've got my thinking straight. The IRS instructions state that a tax payer can generally avoid paying a penalty if he:

1. Owes less than $1,000 after all withholding and credits;
2. Pays at least 90% of the current taxes due; or,
3. Pays at least 100% of the taxes due for the prior year, "whichever is smaller."

I initially presumed that "whichever is smaller" applies only to #s 2 and 3. I have grown less confident in that conclusion the more I think about it. Since the penalty is ostensibly avoided if any of the above criteria is met, does the phrase apply only to all three provisions or to just the last two?
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Since the penalty is ostensibly avoided if any of the above criteria is met, does the phrase apply only to all three provisions or to just the last two?

Meeting any of the three safe harbors is sufficient. Meeting the smallest safe harbor is sufficient.

Item 3 is incomplete. If income is above a limit (150K or 75K for married filing separately), the amount is 110%.

Whichever is smaller could apply to 1, 2 or 3.

Example:
1.) previous year taxes were $900
2.) less than $1,000 is owed for the current tax year

The lowest safe harbor is $0, item 1.
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Example:
1.) previous year taxes were $900
2.) less than $1,000 is owed for the current tax year

The lowest safe harbor is $0, item 1.


Thanks for mentioning the 110% rule, as I failed to mention it seeing that it does not apply in our case. And, thanks for the clarification. I can see how the particular criterion that might be met could change in any given year depending on the amount of taxes paid and whether there is a substantial increase or decrease in ones taxable income. And, I can see how one could technically incur a penalty (even if he may otherwise be due a refund) if, while he meets at least one of the safe harbor criteria, he failed during the year to timely pay the proper amount of taxes as his income was earned. However, I'm still having a problem for practical purposes visualizing how "whichever is smaller" is meaningful so long as the tax payer pays his taxes timely and meets at least one of the safe harbor criteria. Presuming that ones taxes are paid timely, is it possible that one could meet only one safe harbor criterion and it not be the "smaller" amount, thus triggering a penalty? The phrase in question just seems a bit superfluous to me.
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Presuming that ones taxes are paid timely, is it possible that one could meet only one safe harbor criterion and it not be the "smaller" amount, thus triggering a penalty? The phrase in question just seems a bit superfluous to me.

No, the first safe harbor is by definition the one with the smallest value.

There are three safe harbors. For ease, lets say their amount are X, Y and Z. Don't worry about which safe harbor they represent.

They could all be equal, but more likely they are different.
The following is true:
X <= Y <= Z

Any amount equal to or exceeding X, meets the safe harbor with the lowest value. It could be any of the three.

Any amount equal to or exceeding Y, meets two safe harbors. The lowest and the next.

Any amount equal to or exceeding Z, meets all of the three safe harbors.

The statement is meant to clarify, that the smallest amount is sufficient. If you are use to reading specifications carefully, it doesn't add any additional information.
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Example:
1.) previous year taxes were $900
2.) less than $1,000 is owed for the current tax year

The lowest safe harbor is $0, item 1.


... And, thanks for the clarification. I can see how the particular criterion that might be met could change in any given year depending on the amount of taxes paid and whether


The particular safe harbor can also change from "quarter" to "quarter" if you use the annualized income worksheets to calculate your tax liability.

Ira
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Thanks, vkg and Ira. Very helpful.
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