Let’s suppose I’m selling some securities on December 31, 2001. How should I go about paying capital gains tax so that I won’t have to pay penalties in April?
Thanks in advance.
??
It’s treated as income so as long as you pay by April 15 I think you are fine. Is this right?
IANAFP, IANAA (I am not a financial planner or accountant)
You have gains??? 
I believe for the feds and in many if not most states, fourth quarter estimated taxes are due January 15, but if you file and pay your taxes by January 31, you don’t have to make the quarterly payment.
I imagine the IRS has the estimated payment schedule on their website. You might want to check with a more authoritative source.
It depends on the Capital Gains amount. If significant, it may appear to the IRS that you underpaid taxes throughout the year.
Assuming a significant amount, pay the estimated tax amount you may be due by January 15. File with Form 1040 ES.
Then when you file your taxes complete Form 2210; Underpayment of Estimated Taxes. If you do not file this form, the IRS will calculate a tax penalty as if the capital gains income was earned over the year. They will calculate penalties automatically.
With Form 2210 you will be able to state that these gains were all realized during the fourth quarter.
Instructions to 2000’2 Form 2210 are here: http://ftp.fedworld.gov/pub/irs-pdf/i2210.pdf
Form 2210 is a complicated document.
For general info on estimated taxes check this site: http://www.fairmark.com/estimate/est101.htm
If you prepaid or withheld as much this year as you paid in taxes last year, you will not be penalized. This gives most people a 1 year “free ride” on avoiding penalties for things like cashing out large blocks of stock, allowing you to simply pay in April without extra penalty. Just don’t do it again the next year.
If you need to prepay, there is a “estimated tax” form which is due quarterly (1040-ES).
Very large caveat here - believe your financial advisor, not me. IANAA either.
Yabob, that sounds familiar. I was in that situation once and called the IRS and I believe that is what they said.
I have to also ask…you have gains?
Heck, I have gains this year…after all the stock was purchased about a decade ago. But I have offsetting losses for much of it so my income tax situation is pretty much unaffected.
Great, thanks for the tips.
And yes, we have gains - the securities were purchased before the stock market madness that swept the country these last few years. You’d be amazed how much paper profit has been wiped out, though.
Oh well, less taxes to pay. Easy come, easy go.
barker’s fairmark link will give you the details you want on the rules - the first section “Who Must Pay” mentions the same 1 year “free ride” I did. This applies to a lot of people who haven’t switched jobs or anything, so they’ve had routine withholding totalling to the same amount or a little more than they paid the previous year.
And, boy, aren’t YOU nosy - anyway, yeah, some piddling gains - not like last year, when I paid for cashing a large slice of my chunk of the bubble (I wish I had cashed everything I had, but, hey, I’m still worth a LOT more than I was 4 years ago - I’m just not filthy, stinking rich). Actually, my worry is having enough income to offset possible AMT on options I exercised to hold at the beginning of the year since they were so far down (yes, I’m still above water on them - just not by 1000%).
Call the IRS! They have people waiting to answer your questions. It’s September, not April - the question answerers have little to do.
Or, go to http://www.irs.gov and download Publication 17 from the downloads section. This is the general answer book for all Individual tax questions. They may also have a specific capital gains booklet and forms available. Do a search for them. (I’ve never had any capital gains :p)
Their lines are busy with people calling to ask why they haven’t received their rebate checks. Besides, the odds are good that if you do get through, the customer service rep will just look up the answer in Pub 17 anyway.
Here’s a trick - up your withholding at your job, if possible. The IRS doesn’t care when you had wages withheld.
For example, last year I did the 1 year free ride thing yabob mentioned, but this year I had an unexpected (but good!) thing happen in August. Since I can’t do the same free ride two years in a row I’m withholding a large portion of my paycheck for the rest of the year. It will work out that I’ve withheld enough to avoid penalty, but I won’t have to do estimated taxes.
Gazoo & Synergist: If you do call or visit the IRS, they will probably just be wrong anyway: