I took a one-time capital gain in September, and I would prefer to not pay a tax penalty. I’ve never filed quarterly, but with the gain, I’m not going to have 90% of my tax liability paid, and I’m not going to be able to use the 100%-of-the-prior-year’s-liability loophole, either. So, hopefully easy question to SDMB tax experts!
Here’s what I’ve been able to figure out from poking around online:
a) Even though September is in calendar Q3, it’s considered Q4 for quarterly tax filing reasons. (For some reason, it appears Q2 is two months long and Q4 is four months.)
b) I have to pay the tax on Q4 by Jan 15, 2016
c) Online resources point me at ways of estimating annualized income and taking a quarter of that. That doesn’t seem to have mapped on to what happened here, since the result here is very lumpy 2015 income.
d) However, since this is “Q4”, it sounds like I can ignore the Jan 15, 2016 deadline as long as I get my entire tax year squared away by Feb 1, 2016.
So, assuming I calculate my tax correctly and pay it by Feb 1, 2016, am I going to be hit with any penalty here?
I don’t know enough detail to answer your exact questions.
But IME the penalty for underpayment is relatively trivial. Like for $30K in underpaid taxes you owe them an extra $200 in penalty. BFD. Yes, there’s interest too, but you did have the use of the money all that time, so you mentally account that as an offset to the interest hit.
It should only take you about 15-20 minutes to rough out a Form 2210 to get a pretty good idea of what you’d owe in penalties depending on whether you pay up in the Jan 15 1040ES or wait until April. You can decide if this is a problem worth worrying about between now and April. I wouldn’t unless this capital gain is more than about 20% of your total annual taxable income.
If this gain is a material hunk of your annual income, you will want to file an accurate 2210 with your return to minimize the interest & penalty. However bad the tax hit for a big lump of income in September is, it’s even worse if they assume you earned it earlier in the year. Which they will unless you file 2210.
Thanks, LSLGuy! What exactly is the 2210? Is that a statement just to make the IRS aware of additional income? Or does it typically accompany an actual payment?
Sorry, this aspect of taxes is new to me! I’ve never had to worry about when in the year income occurs before. It was always either completely smooth or someone managed withholding on my behalf.
The Form 2210 is used to report income or deductible expenses that are lumpy during the year. You file it as part of your annual 1040 package if necessary. And in your case this year it’s probably necessary.
Absent that form the IRS assumes all your income and expenses are evenly spread across the year.
What I’m suggesting now is this: you can get the form and instructions from the IRS and put in some decent estimates of your total annual wages, deductions, & such. And also put in the lump of capital gains. The form will end up telling you how much penalty or interest you owe.
You can try figuring it out different ways: e.g. assuming you pay the extra estimated taxes on the capital gain now, or in January, or wait until April when you file the return.
The rough form you dummy up now won’t be perfect, but it’ll help you understand how big a deal this is or isn’t in the context of your overall taxes. Also how much it matters, or doesn’t, between paying up now, in January, or in April.
Lumpy income and deductions isn’t hard or bad; it’s just one more wrinkle to deal with.
If you are in regular employment, you could increase the withholding from your salary for the rest of the year - submit an amended W-4 to your employer. Maybe this will allow you to reach one of the 90/100% thresholds you mention.
LSLGuy is right about the amount of the penalty… while there are multiple ways to calculate and to reduce it, the worst-case scenario is never more than the IRS’s 3% interest rate averaged over a year, which means basically 1.5%.
And that’s only if you owe more than $1,000 and if you didn’t pay at least as much as last year’s tax, and if you don’t use one of the alternative calculation schemes that don’t annualize the income. All of those things can reduce it to something less than 1.5% (even $0).
My recommendation would be to have as much tax withheld through your normal source (wages, I assume) as last year’s total tax. (Check the second page of last year’s 1040 for the line with that exact name). If you do at least that much through payroll, you’ll have no penalty for under withholding no matter how much tax you owe. Then you just have to finish paying it by 4/15.