Does one have to pay estimated taxes for capital gains? I have a large amount of capital gains for the first quarter of 2021, do I need to pay estimated taxes on them?

[Critter-3]

Do I need to make estimated tax payments to the IRS?

You must make quarterly estimated tax payments for the current tax year (or next year) if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits. 
 
- 2. You expect your withholding and credits to be less than the smaller of: 
    90% of the tax to be shown on your current year’s tax return, or 
  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

https://ttlc.intuit.com/replies/3301891

 

How do I make estimated tax payments?

https://ttlc.intuit.com/replies/3301258

Can TurboTax calculate next year's federal estimated taxes?

https://ttlc.intuit.com/replies/4242911

Can TurboTax calculate the estimated payments for next year's state taxes?

https://ttlc.intuit.com/replies/3301735

[rncala]

Bottom Line:  If it's taxable you need to pay estimated taxes.  See https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates

or IRS.gov for rules, instructions and calculators.

If you are reasonably sure of your yearly income, interest and non qualified dividends you can pay the appropriate estimated tax (0,10 or 20%) on capital gains and qualified dividends.  If you earn significantly more, or less than expected you can add funds to your account at IRS.gov online at any time.  

For,

Earnings + Interest + Non Qualified Dividends < $40,000 Single or $80,000 Married 

Capital Gains and Qualified Dividends are not taxed.

If,

Earnings + Interest + Non Qualified Dividends = $40,001 to $441,450 Single or $80,001 to $496,600 Married

Capital Gains and Qualified Dividends are taxed at 15%

For,

Earnings + Interest + Non Qualified Dividends > $441,451 Single or $496,001 Married

Capital Gains and Qualified Dividends are taxed at 20%

[daled1]

Thanks!  That clears it up.

[fanfare]

 100% of the tax shown on your prior year’s tax return.

In other words, no matter how big your capital gain, 

if this is satisfied you don't need to send any more in 2020.

BUT, you will have a big tax bill in 2022.

[rncala]

Paying 100% of 2019 taxes exempts you from an underpayment PENALTY for 2020 taxes.

However, you still have to pay INTEREST on the underpayment amount.  Since your cap gains were in Q-1 you’ll pay interest for most of the year.

Fortunately, current interest rates are historically low; so if you can make more money in the market it might pay to play it that way.

Good news is that you made a lot of money and you have some choices!

[rncala]

I meant to write 2021 and 2022 tax years.

[daled1]

Oh, now that is interesting.   

Just to be clear,  lets say I paid 30k in taxes for 2020, that is on earned income and capital gains, lets assume a 50/50 split.

If I make a 30k payment for the first quarter of 2021 estimated, then I won't get an underpayment penalty for 2021?   Even if at the end of the year I end up owing 500k more in taxes?

Do you happen to know what interest rate the IRS is currently using?

Thanks!

[smokinbro]

yes if it results in material taxes owed

[daled1]

Hi smokinbro,

Are you responding to my original post?  Or the most recent reply I made?

[rncala]

Good question.

If you paid $30k in 2020 taxes, your quarterly payments for 2021 are $7,500 to avoid a penalty regardless of the income source mix.  

So, if you are:

1. Reasonably sure of your yearly taxable income excluding cap gains and qualified dividends, and

2. Have established a non-zero tax rate for cap gains and qualified dividends of say 15 or 20%,

you can add the tax due for any taxable cap gains and qualified dividends that brings you over the $7,500 owed in a given quarter to avoid interest payments.

These are all just approximations to zero in on the true amount due which we won’t know for sure until we run it through TurboTax 2021.

[rncala]

Interest rates are in flux this year; so it’s hard to say where they’ll be in a few months.

[rncala]

Most recent, in the context of my reply to your OP.

[daled1]

Ok, let me give you another scenario.

in 2020 lets say I paid 30k in taxes.

in the first quarter of 2021, lets say I already have 400k of capital gains, which at 15% means I owe 60k in taxes.

So are we saying if I submit a payment of 30k, I will avoid underpayment penalty?  But obviously I will be subjec to the interest rate charge at the end of the year.

[rncala]

Sounds right to me.  

Unavoidable Downside:

Although your cap gains don’t count toward determining your cap gains tax rate, they do count in your taxable income (AGI).  So, next year’s quarterly payment to exempt a penalty is

($30k + $60k) / 4 = $22,500 not $7,500.