Estimated tax payment.

If these are mutual funds, they will often notify shareholders if they expect to be making unusually large capital gain distributions at the end of the year. If they don't warn you proactively, you can call them a few weeks before their usual distribution dates, and ask them for an estimate.

One never knows for sure, that's why it is "estimated". I give it my best guess and round up a bit so that I will be sure to pay 110% of the previous years taxes (safe harbor amount), based on previous years taxes. If you do have unexpected income in a given quarter or have a lower than expected withholding, so that you will not fall under the safe harbor, you can always increase the amount of estimated payment for that quarter, but if you do that, be sure to file a 2210 form (Annualized income installment method) to avoid any penalty for nat making equal payments.

Since you have wage income, you might be able to avoid making estimated tax payments simply by making adjustments to your withholding.

I simply estimate my total tax liability, using all of the same information that goes into a 1040; then I use the withholding tables to determine the number of allowances to withhold the right amount by the end of the year.

OP's issue was not knowing what his gains would be. So I see a few choices:

1) Pay the 'insignificant' penalty. If indeed it's that small, it may not be worth the effort to follow my next choices. "gee, honey, I messed up again, let's go shopping" should work for SWMBO. 2) Adjust withholdings to pay too much, e.g. plan to refund $2,000 instead of owing $2,000. Not recommended, but one way out. 3) Track gains and taxes through the year. Year to year changes are minimal (the tax rates, and exemptions, I mean) so using 07 TurboTax will at least narrow things down. As you see the tax due and penalty, a quarterly payment can be made.

Joe

Without estimating (wrong,probably) you can do it exactly with a Quarterly Installment tax calculator which you can download from the web. This works particularly well for you when your gains are distributions from mutual funds at year end. It computes the exact installment necessary for each quarter without overpaying just because of a mid-year gain.

ed

I believe that if you pay, in estimated and withheld taxes, an amount equal to 100% (or 110% if your income is over $150K filing jointly) of your taxes from this year, you will owe no penalty.

So just see what you've paid for 2007, and ask your employer to increase your withholding by an amount sufficient to reach that number. You'd probably file a new W4.

--ron

Its only "estimated" because the 2008 tax brackets wont be set for another 6 months. Most likely they will be more generous than now due to inflation. Otherwise you can compute your necessary tax exactly according to 2007 tax laws.

I use my $15 TurboTax program to compute a column of

2210 penalty form- each quarter. Essentially you print your paycheck and every income producing account on April 1, June 1, Sept 1 and Jan 1 and ype this into the 2210. If your broker breaks out the long term gains and dividend parts, Turbos Tax handles this too. If the 2210 shows a tax deficiency, I round up the deficent amount to the nearest hundred and debit that to my electronic IRS account. Be sure to update your 2210 with the paid estimate, so you are ready for the next quarter. The only problem with Turbo Tax is I cant feed a 2007 tax return into a 2007 2210 form (only accepts a 2006 tax return). So I have to override those numbers with control-R on the 2210. Should I get a penalty-due letter from the IRS, I have seend them my 2210 then to delete it (and they do so).

If you receive most of your untaxed income early in the year, you keep your money longer if you use the equal-quarters method of computing the penalty.

Rick. 2008 tax rates have been available since late 2007, along with all the phase-out constants. It's just that TT does';t have them. Using 2007 TT the way you are is bad news if you are in AMT land, and as you know is using 2007 rates and constants. Why not just get a real 2210 tax calculator downloaded from the web and do it right.

ed

Not really. For me, and maybe others, the largest unknown was the amount of income I might receive in the coming year which might include unexpected capital gains, a large amount of overtime pay, bonuses (which are supposed to have extra withholding but still cause problems) and other variable income. When that is coupled with the same variables in my wife's pay, then the small change in tax brackets and rates were almost lost in the noise when compared to the volatility of our income.

I still believe the safest course is to withhold and/or pay estimated tax to the safe harbor and then not worry about it - either pay up taxes due (interest free loan to me) or receive a refund (interest free loan to the gov.) next year.

I understood that. I think you missed my point. I said "making adjustments" -- plural. That is, make periodic adjustments, either as gains are realized or once or twice during the year.

The advantage is: withholding is presumed to be evenly distributed throughout the year, even if it is not. So you know if you have covered your tax liability without risk of penalty as long as you have withheld enough by the end of the year.

If you try to make the same adjustments by making uneven estimated tax payments, the annualization computation is more complicated, and you risk a penalty in one payment period or another, even if your payments cover your total tax liability.

Of course, if you don't have sufficient income subject to withholding, you have no choice but to make estimated tax payments.