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Estimated taxes on big mid-year lump of cap gains?

Normally I get taxes withheld from my paycheck, which is most of my earnings, but this year I had a very large sum of capital gains mid-year.  Do I need to pay estimated taxes on that sum before I file next year?  If so, can I just calculate the amount I think I owe (either 15% or 20% of the total) and send in a check for that amount along with the 1040-ES stub?  Or do I need to complete the full 1040-ES worksheet and set up some sort of quarterly payment?

 

Thanks!

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2 Replies
rjs
Level 15
Level 15

Estimated taxes on big mid-year lump of cap gains?

You need to pay in advance one way or another. You can either make an estimated tax payment, or increase your withholding for the rest of the year to cover the tax on the capital gain.


If you want to make an estimated tax payment you don't have to do the whole worksheet. The worksheet is just to help you come up with an amount to pay. You can just send a 1040-ES voucher with a check for whatever amount you think is appropriate, or you can make the payment online from your bank account using Direct Pay on the IRS web site. You don't have to make any additional quarterly payments.


If you want to try adjusting your withholding you could use the Tax Withholding Estimator on the IRS web site. However, the Tax Withholding Estimator does not take into account the lower tax rates on long-term capital gains, so if your gain is long-term you would have to fudge the amount of income to compensate for the lower rate.

 

Anonymous
Not applicable

Estimated taxes on big mid-year lump of cap gains?

there is a safe harbor that will allow you to avoid federal underpayment penalties.  Your withholding must equal 100% of your 2019 tax or 110% of 2019 tax if your 2019 adjusted gross income was $150,000 or more. using this you could owe millions without federal penalty.   your other option is to make estimated tax payments. however, the usual method for penalties computation is to assume your tax liability is even throughout the year as is withholding.  thus under this method you could have penalties for the first couple of quarters.  there is a way to avoid this by using the annualized income method.  this requires you to compute your actual taxable income for the first 3 months, 5 months, 8 months and the full year. the amount is annualized the tax is computed on this annualized income and then de-annualized.  this is then compared to actual estimates and tax withheld for the period.  

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