Taxes on capital gains, when paid?

If your timely equal 2007 estimated tax payments plus withholding are at least as much as 110% (maybe less) than your 2006 total tax you can hold onto the rest of it until

4/15/2008. See IRS Publication 505.

"Ted" wrote

If you're looking at a huge gain, and you can time in for December or January, consider your income this year, as well as next, before this extra gain is factored in. Also consider what you are going to do with that money. The higher income reduces itemized deduction amounts, so consider that as well in your timing.

If you time the gain for January 2007, make sure you meet the safe harbor for estimated for 2006 taxes, bank the rest in a CD or something so it's available in 2008 when the bulk of the taxes will be due.

Regardless, make smart decisions about what you do with that gain money.

If you make the gain in 2006 you can wait to pay the taxes on it until April `5, 2007 without any penalty. If you take the gain in January 2007 the taxes on the gain will be due April 15, 2008 and there will be no penaltyy as long as you pay estimates in 2007 each equal to 1/4 of your 2006 tax (110% if AGI in 2006 is over $150,000 and $75,000 if you are filing MFS). ed

No, taxpayer will have to pay the tax by January 15, 2007 to definitely avoid an underpayment penalty.

Steve

Thanks, but that brings up another question. My 2005 AGI was $157,000. I paid 50% of my estimated taxes on 4/15/06 and 50% on 10/15/06. I am expecting my 2006 income to be significantly higher, even if I defer the income referred to originally. Since my

2005 income is over $150k and I only paid 100% of the estimated taxes am I vulnerable to a penalty? TaxCut said to pay 100%, but I guess that is why it is $14. I quickly ran my information through TaxCut and it came up with a $55 penalty; presumably because I paid 100% rather than 110%. If that is all there is, it is not a big deal; but if TaxCut is wrong about the penalty size also, I can always pay the other 10% by 1/15/07 and be okay, right?

Steve is wrong. As long as he had paid as much as his 2005 tax, in equal installments, there's no penalty if he takes the gain in 2006 and waits until April 2007 to pay the rest of his tax due for 2006. However, we now find that he didn't meet the 110% requirement so if even if he pays the other 10% by Jan 15,

2007 he'll have a penalty even if he completes form 2210 Schedule AI, unless his annualized tax on 90% of 2006 income, prior to September 1, 2006, is less than 100% of 2005 tax. So, he can't just "pay the other 10% by Jan 15" and avoid a penalty. ed

If he takes the gain in early 2007 the due date is April

2008 if he pays 4 equal installments of 1/4 of 110% of his 2006 taxes (assuming AGI for 2006 is over $150,000). There isn't a problem paying 50% of his estimates (whatever they are supposed to be) on April 15 but the other 50% (or 25%) is due September 15, not October 15, creating a penalty of 8% simple interest for a month

Compute your taxes three ways - annualized estimated income for 2006, annualized and equal installment for 2007. Then you can choose which way requires the slowest payment of taxes. ICompute this ASAP. In general equal installment, favors early year income and annualized late year income.

The Anualized Income Method automatically computes the lower of either safe harbor or annualized for each instllment. Your generallity is usually correct, but a Capital Loss Carryover (or capital losses incurred in the first quarter) can often make the AI method attractive, as can even paying your property taxes in January. In other words, you resllay need to factor everything into the Schedule AI to maximize it. Also, when computing the AI Method for the current year, DO NOT estimate current year's income. Use ONLY actual income for each quarter as earned. The logic of this is that if you estimate too low you'll create a penalty you can't overcome and if you estimate too high the estimate is lost to the lower actual amount of installment required. Just don't estimate. ed