Estimated Tax or Penality

Situation is I have no earned income from farm operation but I have and expect to have short and long term capital gains and will owe substantial income taxes at year end. Question is whether I should initiate estimated tax payments now or just wait until I file to pay tax due and penalty, which will result in the lower overall tax bill? What are the components of the penalty, interest % and calculation? Help would be appreciated.

Reply to
JB
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Generally you should make 2010 estimated tax payments in 2010 and in January 2011 if:

(1) you had a tax liability in 2009, and (2) you are having income (including capital gains) in 2010

The amount you pay each period to avoid penalties should be at least the lower of:

(1) One quarter of 110% of your 2009 tax liability, or (2) One quarter of what your 2010 tax liability would be if you continued to have income at the same pace, year-to-date.

If you do the above, or pretty close to it, your penalties for 2010 will be low or zero. If you miss an estimated payment, make it as soon as possible.

Good luck.

Steve

Reply to
Steve Pope

The more you pay now, the less you will pay later.

It's called a "penalty" for underpayment of estimated taxes, but it's really just interest, at standard government rates i.e. better than what your credit card charges in most cases. For example, in 2009, the "short method" penalty (interest) would have been 2.66% of the amount you underpaid (not the entire amount due). This reflects the fact that some of your underpayment was due 4/15/2009, some due 6/15/2009, some due 9/15/2009, etc -- the interest is only charged from the date due.

Form 2210 in all its full-length glory is one of the more computationally-challenging forms that most taxpayers will ever see. You typically have the option to just leave it off your return and let the IRS calculate and bill you.

Some find that just paying the interest/penalty charges more than offsets the time and effort to deal with estimated payment calculations.

Steve's answer deals with estimated payments; you also have the option to meet some or all of your estimated payment obligation through withholding, which can be done at any time up through Dec. 31st.

If your state has an income tax, then it also most likely has its own rules for underpayment of estimated tax penalties.

-Mark Bole

Reply to
Mark Bole

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