Underpayment penalty for uneven capital gains

[anilj]

I am working on the Annualized Income Method for calculating underpayment. I am confused with what TT is asking. It first asks to enter in my AGI over the 4 quarters (which includes Capital Gains).

Then the next question it asks is what my (LT/ST) Capital Gains were over those 4 periods. I know it's asking for because the taxes are different for capital gains... but it's also included in the AGI, so is it going to double count the income (AGI+Capital Gains) for penalty calculations?

[phildonnia]

Capital gains are included in Adjusted Gross Income.  The confusing terminology isn't really TT's fault; that's how it's written on the tax forms.

The tax calculation will apply the correct rates to the correct types of income, and will not count Capital Gains as income twice.  You can trust that Turbo Tax knows how to do this.  

Another similar confusing one is "Ordinary Dividends" and "Qualified Dividends".  Again, one includes the other, even though the names sound like they should be separate.  And again, the tax calculation separates them out before applying the correct rates.

[DawnC]

No, nothing will be doubled.  The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. You can do this either through withholding or by making estimated tax payments. If you didn't pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. 

When you use the Annualized Income method, you are telling the IRS that you did not receive your income evenly throughout the year and therefore you penalty should be lower.    If your total income was 100K, you would be expected to have paid the tax due on 25K each quarter.   However, if you earned 80K of the 100K in the 4th quarter, this would essentially lower or possibly even remove the penalty.   

Generally, taxpayers should make estimated tax payments in four equal amounts to avoid a penalty. However, if you receive income unevenly during the year, you may be able to vary the amounts of the payments to avoid or lower the penalty by using the annualized installment method. Use Form 2210 - Underpayment of Estimated Tax to see if you owe a penalty for underpaying your estimated tax.   The law allows the IRS to waive the penalty if:

1. You didn't make a required payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
2. You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.

You can choose to let the IRS calculate the penalty, or request a waiver of the penalty or do what you are doing and use the Annualized Income Form to calculate and pay the penalty.  Long-Term capital gain rates are generally much lower than the short-term rates, so the timing of those earnings will have an effect on the penalty calculation.   But the total income on the AI form will be the same as your AGI on the tax return.   

For more information, refer to the Instructions for Form 2210 

[anilj]

Thanks for the detailed answer!

Also, for 2021, I am also expecting uneven capital gains. I am planning to pay estimated, but what if the estimated payments are not 4 equal parts? (e.g. if I pay $500 before April 15th in estimated and $1000 before Sept 15th)?

(In another words, I expect to sell stock for gains but I don't know how much I will be selling... I think the estimated taxes will be uneven as well for the quarter I sell).

Is there anything specific required for this process?

[fanfare]

when you execute your sell transaction,

calculate your gain (presumably) and calculate the estimated tax based on that.

Pay before the quarterly deadline coming up.

Nothing stops you from making two payments in one quarter, if your income changes.

[anilj]

Sure... but is there anything special to do if there is uneven estimated taxes? (e.g. when I sell stock). Every quarter, my estimated taxes will be different. Do I just list those in TT in 2021 taxes (next year) and would Form 2021 be required then?