Due to a large capital gain distribution from a mutual fund, I owe the IRS additional money for 2007 --and maybe even a tax penalty! What should one do when finding out that their mutual fund is getting ready to declare a big capital gain? I mean, what forms do I need to use in order to estimate my additional taxes? How much time do I have to pay the additional taxes? Thanks.
Due to the lack of specific information I suggest you read form 2210 and its instructions and/or Publication 505, but probably the folowing will suffices: Pay an intallment with a 1040-ES voucher NOW which, when added to your withholding and/or other installments, will be at least the amount of your 2006 tax (110% of 2006 tax if 2006 AGI was over $150K), Then, complete a form 2210 and Schedule AI and pay the remaining taxs due wih your return. You will have a 8% simple interest penalty for the amuont of the payment you make from Jan 15 to the date received by the IRS. Next year make the payment by January
15 for NO penalty. Your mutual fund usually has this information by mid December.If your withholding generally covers the tax due on your regular income the above is all that is necessary. If you don't have a big gain distrbution you can alternatively pay total of 90%of your current year's tax, whichever is lower. If the gain comes mid year you must make the ES payment at the end of that tax quarter, unless you can increase your withholding to meet one of the above "Safe Harbors". Return for more advice, if you ned it, after reading the above referrences
ed.
But, you should pay attention to 2008 planning now, so you won't owe a penalty next year.
Some mutual funds make available estimates of their year end distributions in Oct or Nov. Use these amounts to do year end tax planning.
With regard to your 2007 cap gain distribution, I'll speculate that it came at year end. So, when preparing your form 2210, use the annualization calculation. That should minimize any penalties. There are also other safe harbors to avoid underpayment penalties, such as covering 100/110% of last year or 90% of current year.
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Something called a "safe harbor", i.e. having paid nearly as much tax as in the previous year, will probably prevent a tax penalty for
2007.Note that safe harbors generally dont work more than one year in a row. Once you have a steady stream of untaxed investment income you have to pay quarterly estimated tax on it to avoid penalties.
The first 2008 quarter ends 3/31 and is due 4/15. I usually save a copy of taxcble brokerage statements for the end-of-quarter months and the that paystub. Then I type that into the 2210 form in the tax software to see the minimum tax to avoid a penalty.
rick: What software do you use that will compute your installment s on the annualized income method for the current year? or does your software just divide last year's tax by 4?
ed
I believe that is incorrect or incomplete.
First, worrying about estimated tax on "untaxed investment income" is an oxymoron. I presume you mean (investment) income that is not subject to withholding or, simply, income from which tax is not withheld (for any of a number of reasons).
Second, if the OP has income subject to withholding, the OP might be able to avoid making estimated payments (on income from which no tax is withheld) by adjusting withholding at any time(s) during the year so that the total of all withheld taxes covers the annual "safe harbor" requirements.
I never made estimated tax payments for the 34 years that I was working. I only had to make estimated payments after I retired and no longer had sufficient income subject to withholding to cover "safe harbor" requirements.
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