I plan to have a large capital gain in January 2008. Part of the reason I am waiting to sell is to defer the tax bill to April 2009.
Am I correct to assume that as long as I withhold and/or pay estimated taxes in 2008, equal to or greater than 110% of my 2007 tax, that I will not be subject to any penalties?
Obviously, I can withhold more in order to reduce the tax bill in April 2009 but I would rather earn interest on that money until I am required to pay.
"DaveR" wrote
That works. You can increase withholding or make estimated tax payments.
The 110% instead of 100% of last year's tax is only if your AGI was over $150K lin 2007. Also be sure each installment is cumulatively at least 1/4 of the difference between your last year's tax (or 110%) and your total withholding.equal and on time or you might have a small penalty. In other words, you can't just pay one installment late in the year.
ed
If you make estimated tax payments per se, I believe your assumption is true only if the estimated tax payments are the same throughout the year.
If not, then I believe your estimated tax payment for each installment must be 110% (or 100%, depending on AGI) of the tax liability for the corresponding quarter in 2007.
Withholding is presumed to be evenly distributed throughout the year, even if it was not. For that reason, I prefer avoid making estimated tax installment payments, adjusting withholding instead to cover the entire required or estimated tax liability.
JUst compute 2210 penalty form (both ways) to be sure.
rick++ There's only one way to compute a 2210 for this OP's situation, where current year's tax will be greater than last year's tax and, worse yet, the increase comes in the first quarter. Pay 1/4 of last year's tax each quarter, don't even look at form 2210 as there is no penalty and no need to file it. that's why it's referred to as a "safe harbor".
Now if the gain came in the last quarter you might come out better following the Schedule AI of form 2210, but only if your other income is less than the prior year.
Joue2004's middle paragraph comment is erroneousl. He;'s alluding to the Annualized Income Method, but it's not that simple and won't work for this OP.
ed.
I was not intending to allude to that at all. It is probably just a problem with semantics and terminology. I agree with Rick: just look at Form 2210.
This is all true. I have been paying estimates that were computed based on 110% of my 2006 tax.
My question is whether or not I need to pay ADDITIONAL estimated tax to cover this capital gain.
If not, then in April 2009 I will have a huge tax bill, which is OK with me provided that it does not include a penalty. I do not believe it should, since I will have paid the required estimates.
However, now the situation has changed -- I wound up realizing a sizeable LT capital gain this month, so now I will owe these taxes come April 2008. I assume I do not have to increase my January 15 estimated payment to cover this gain; that is, as long as my estimates cover 110% of my 2006 tax, I can wait until April to pay the large tax on this capital gain.
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