Tax on Capital Gains

[user17704424348]

Since I am retired my only taxable income is interest, dividends, and capital gains. Since the majority of my capital gains occur late in the year usually in December. I don't know how much I owe till then. This year TurboTax says I owe a penalty due to underpayment. This is the first time that happened, so I wonder if it is a mistake.

[Mike9241]

The default method is that you must pay in through estimated tax payments or withheld income taxes, the lower of 90% of your current year taxes or, if less, 100% of last year's taxes. The 100% rises to 110% if your prior year adjusted gross income was more than $150,000. Otherwise, you are subject to underpayment of estimated tax penalties, which is what TurboTax calculated 1/4 of this must be paid for each period: 1/1-3/31,  4/1-5/31, 6/1-8/31 and 9/1-12/31. For estimated tax payments, they are considered paid in the period if they are paid by the 15th of the month following the end of the period. If the 15th is a legal holiday, by the next business day. 

You also have the option to avoid or reduce the penalties by having paid in sufficient taxes using the Annualized Income Installment Method. Form 2210 page 3. Under this method, which must be used for all periods, if used for any period, you must calculate the income taxes on the annualized cumulative taxable income through the end of each of the periods above and then deannualize the tax using line 20 on the form.  

You can use this method for 2025. TurboTax will automatically calculate for the last period because that's what is on your return. 

TurboTax is of no help in computing the taxes for the first three periods. 

[user17704424348]

I forgot to mention that my issue is with the Pennsylvania Income tax. not with the United States Income Tax.

[RobertB4444]

What @Mike9241 says also applies to Pennsylvania.  The state requires that you make an estimated payment to cover the taxes due if you are going to owe more than a thousand dollars for the year.  In your case you don't know what you'll owe until December so the estimated payment to Pennsylvania as well as to the IRS is due on January 15th.  Assuming that you will owe more than a thousand dollars to either agency.  If you don't make the estimated payments in a timely manner then they will charge you a penalty for underpaying your estimated taxes.  

You can overcome this penalty in the future a couple of different ways.  You can increase the withholding amount from any income that you have - including from the investments that you are talking about here - and have that withholding submitted on your behalf just as though it were coming out of a paycheck.  If your withholding is high enough then you don't need any estimates.

Otherwise, you can send in your estimated payment by January 15th every year and cover it that way.  TurboTax can help you prepare estimates going forward as well as helping you figure out the safe amount to send in for the following year to help avoid penalties.

[user17704424348]

My tax is only $644 well below the $1,000. If I send in a prepayment in January, how much do I need to send in.

[RogerD1]

When you were going through the TurboTax interview, were you ever advised that you might owe an underpayment penalty?  TurboTax will calculate any penalty for you and then advise that you can pay the penalty at that time, or you could have the IRS figure out the penalty for you and bill you for it.  When you file your taxes, TurboTax will give you options for paying the balance due that you owe - keep in mind that you can file your return at any time before the filing deadline of 4/15/2026 and schedule to pay the balance due by 4/15/26 without incurring additional penalty amounts.

If you think you might owe taxes for 2026, it is best to used timely estimated payments that are paid through out the year.  The IRS works on a "pay as you go" system and expects tax payments to be paid at regular periods throughout the year rather than one lump sum at the end of the year.  It is possible to get a refund and still be penalized for not making timely payments of your income taxes.