Tax on a stock withdrawal that is reinvested

[msdot281]

We sold a large quantity of stock in a mutual fund account in December because the price started to drop. We re-invested all of the funds into an annuity account. We're both retired and live on Social Security and RMDs. Turbo Tax has calculated the amount upon which we owe tax and it throws us into a tax category that's about 4 times our usual income, plus wants to apply a penalty. Is there anything we can do to avoid this? Also, since this occurred in the last month of the year, don't we have until 3/31/21 to pay any estimated tax on the funds so that we don't have to pay a penalty? And does this mean we have to repay the stimulus checks we received since it shows that we have a much larger income for the year than we did when the checks were issued and now don't qualify? I thought that since we had paid capital gains taxes on these funds for years that we wouldn't have to pay income tax again. So much for what I think ... I'd appreciate any help anyone can give. Thanks!

[fanfare]

"since we had paid capital gains taxes on these funds for years that we wouldn't have to pay income tax again"

That's true but your records have to show that.

Mutual funds in  recent years do that adjustment for you.

If you purchased the funds decades ago you must have good records.

See IRS Pub 550 Table 4.1 for an example of records you need.

as far as stimulus checks go, once they are in your hands, you get to keep them.

Don't file until you get the next $1,400 stimulus check.

[fanfare]

effective tax year 2011, your mutual fund purchase (including reinvested dividends) are covered transactions (Box C), so the fund company has to report your basis in those shares to IRS.

Shares purchased prior to that year are non-covered (Box E) and you supply the basis.

Jan15 was the deadline for an Estimated Tax payment.

[fanfare]

"since we had paid capital gains taxes on these funds for years that we wouldn't have to pay income tax again"

To be clear your basis reduces tax but does not eliminate it.

You still have to pay tax on the gains your fund earned for you over all those years.