Avoiding tax underpayment due to unexpected stock capital gains

Forum|Forum|6 years ago
May 31, 2019
2 replies
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I earned more than expected capital gains from stock sale this year and I am wondering whether I have done considerably lower tax withholding this year. I also wonder whether I will have to pay penalty for tax under payment when I file taxes in April 2015. Is there a way to avoid this IRS penalty by paying estimated tax payments before the year end?

Best answer by dmertz

Most dividend and capital-gains distributions occur at year-end, so making a sufficient 4th quarter estimated payment by the January 15 deadline will eliminate the possibility of a penalty that might otherwise result from these year-end distributions. In other words, make a 4th quarter estimated payment sufficient to cover your overall tax liaibility when combined with your other tax withholding and estimated payments. However, you might need to annualize income on Form 2210 to avoid an underpayment penalty for the earlier quarters of the year. (You could still end up with underpayment penalties for the first three quarters of the year if your other tax payments were insufficient to cover the income in these quarters.)

Even if you don't have enough withheld or paid in estimates to cover your tax liability, if you meet any of the safe-harbors (see TomYoung's comment below) you won't have an underpayment penalty. Regarding underpayment penalties, see: http://www.irs.gov/taxtopics/tc306.html

L

letha-m-joyAuthor

Employee

I have a follow up question. Is the penalty waived if there was no tax liability in the prior year (i.e. if you got a refund) ?

D

dmertzAnswer

Employee

Most dividend and capital-gains distributions occur at year-end, so making a sufficient 4th quarter estimated payment by the January 15 deadline will eliminate the possibility of a penalty that might otherwise result from these year-end distributions. In other words, make a 4th quarter estimated payment sufficient to cover your overall tax liaibility when combined with your other tax withholding and estimated payments. However, you might need to annualize income on Form 2210 to avoid an underpayment penalty for the earlier quarters of the year. (You could still end up with underpayment penalties for the first three quarters of the year if your other tax payments were insufficient to cover the income in these quarters.)

Even if you don't have enough withheld or paid in estimates to cover your tax liability, if you meet any of the safe-harbors (see TomYoung's comment below) you won't have an underpayment penalty. Regarding underpayment penalties, see: http://www.irs.gov/taxtopics/tc306.html

T

TomYoung

Employee

That's a miss statement of the safe harbor provisions.  There are 3 basic safe harbors but the relevant ones here that allow you to avoid underpayment penalties are paying the lesser of
     a)90% of the tax for the current year, or
     b)100% of the tax shown on the return for the prior year.  (If last year's return shows AGI over $150K (for married filing jointly) then change that "100%" figure to "110%.)