Estimated Tax - Safe Harbour

TY 2007 I owed $20,000 in taxes. This year I am paying $5,001 in four equal estimated tax for a total greater than $20,000. In 12/2008 I want to sell a large capital gain position, a million, that moves my due tax for TY 2008 at $160,000.

How and which of my quarterly estimated taxes should I change to avoid underpayment and penalties? The new estimated taxes are to cover for the

110% of past year owed tax and the once large cap gain increase to occur sometime in December. I already paid the 4/15 estimated ($5,001)

Thanks, Alex Turchina

Reply to
valentino
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Should you be paying 110% of 20k, or 5.5k each quarter to be in safe harbor?

Are there state taxes as well? If so, see the recent thread (about a month ago) about being optimistic on state taxes.

Reply to
removeps-groups

Whether it should be at least 100% or 110% of last year's total tax depends on last year's AGI, not on the taxable income this year including the unanticipated capital gain.

There was no reason for you to pay "a total greater than $20,000" -- at least, not just $4 greater.

Since you apparently decided that 100% was safe enough, there is no need to alter your estimated tax payments to avoid underpayment penalties per se.

Moreover, I believe there is something to be said for keeping estimated tax payments equal throughout the year. I believe it makes it easier to determine that you meet the safe harbor requirements.

However, if you would like to "avoid underpayment"

-- that is, avoid owing a large amount when you file your tax return next year -- I would simply fill out a mock Form 1040, including the capital gain, to estimate this year's total tax, subtract the amount of taxes paid with estimated tax payments to-date and through withholding for the year, and divide that difference by the number of remaining estimated tax payments to determine the estimated tax payment for the remainder of the year.

On the other hand, if you are now questioning your decision to pay only 100% of last year's total tax in the first place, I would fill out a mock Form

2210 to determine what you need to do moving forward to avoid an underpayment penalty, if any.

Having said that, I should note that in my experience as a taxpayer, the underpayment penalty has never been so large that it is worth worrying about, as long as I had made a good-faith effort initially to estimate my tax liability. The most I have paid in penalties was less than 1% of the total tax. And that was in a year when the taxes paid throughout the year wer inadvertently and inexplicably less than 60% of the safe-harbor requirement.

I never worry about owing significant amounts at filing time. I account for that in my cash management. In other words, I try to ensure that I keep in savings what I expect to owe.

Reply to
joeu2004

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