Do I need to make estimated tax payment (1040-ES) to avoid penalties on short term gain from stock trade?

Gordon3 · ‎December 1, 2020

For tax year 2019, I received a refund from the IRS and I received a refund from the Alabama Depart met of revenue, so my withholding and other payments have been sufficient to pay my taxes in the past.

I sold a stock in November 2020 that was purchased in March 2020. I made a nice short term gain, and am now concerned about taxes and in particular, I would like to legitimately avoid tax penalties. How do I legitimately avoid tax penalties in this case?

I am already sending in quarterly payments to the IRS via Form 1040-ES, and think that I can address the taxes from the November 2020 tax sale (short term gain) by increasing the amount I pay prior to 1/15/2021. I think I will remain the same tax bracket, so I will multiply the amount of the short term gain by my marginal tax rate to determine the additional amount to be included. Is that the way this should be handled?

For the Alabama Department of revenue, I think that the rate is 5% no matter what else is considered. In that case, I think I need to multiply the amount of the short term gain by 5% and send that in via form 40ES 2020 by 1/15/2020. Is that the way this should be handled?

Anonymous · ‎December 1, 2020

both Alabama and IRS rules are the some for avoiding underpayment penalties

no penalty if on a timely basis, your withholding and estimated tax payments are the smaller of the following two amounts

1) 90% of 2020 tax

2) 100% of 2019 tax (110% for IRS if 2019 adjusted gross income is more than $150,000

also

3a) for the IRS if 2020 tax less withholding is less than $1000 no penalty

3b) for Alabama if 2020 tax less withholding and estimated tax payments is less than $500 no penalty.

it is likely exception 2 above would be the lowest for the amount of taxes that have to be paid in through withholding and estimated tax payments. meeting this exception means you could owe $1,000,000 come tax time and still not get hit with a penalty. it's up to you as to whether to increase estimated tax payments to cover the STCG if you will be safe from penalty under 2) above. some people just do not like to owe come tax time.

Gordon3 · ‎December 1, 2020

Thank you for the help. The 2019 Married Joint AGI was more than $150,000 and withholding was 109%. It looks like I almost made it with exception 2, but I do need to send in more in estimated taxes or pay penalties.

I certainly will not owe $1,000,000 in taxes. However, taking the 2019 Married Joint AGI, adding the 2020 short term capital gain that drove my initial question, then assuming the standard deduction, it looks like I will reach into the 32% marginal rate for the 2020 joint return.

I am also giving this some thought. I also have a long term equity (energy index mutual fund) position that is currently an unrealized loss, and I could sell that position to offset some of the 2020 short term gain. Here I am mixing a short term gain and a long term loss, but the two items would be large enough (compared to my other long and short term gains) so that some offset would be realized. The energy segment has been down for years but there could be a turnaround in the next year or less. How big does that indefinite turnaround need to be before that lost opportunity exceeds the value of the more predictable tax savings? If I sell the index and buy some of its top ten holdings, I think I would avoid a wash sale, but if I sell those holdings within 12 months then I am again facing short term gains.

Do I need to make estimated tax payment (1040-ES) to avoid penalties on short term gain from stock trade?

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Investors & landlords