Say a stock you own increases a lot sometime in Q4, so you sell.
But there was no chance that you could’ve expected this throughout the year?
How does this factor into estimated taxes? Can I be penalized for something completely unpredictable?
There is a safe harbor where if you pay 100% of the previous year’s tax liability (or 110% if your AGI was above a certain threshold; $150k for 2023), you do not pay any penalties. Failing that, there is an annualized installment calculation you can use that is meant to account for lumpy income and adjust required estimated payments accordingly in Schedule AI of Form 2210.
Because 4th quarter taxes are due on January 15th……, which is 15 days after the quarter is over, it is not unpredictable. You should know your gains since it already happened. All estimated taxes are due “after” the quarter is over.
Safe harbor is 110% of prior year’s tax.
You only have to pay estimated taxes in the quarter you generate the income. If your income isn’t earned evenly throughout the year, you need to fill out Form 2220 to show the IRS when the income was earned and when the estimates were paid.
It’s completely predictable. You are the one who is selling them. That is when the taxable event occurs. It’s one of the things you probably can fully control the most as to when you get taxed on it.
The accepted amount for your estimated tax payments is 100% (or 110% depending on your income) of the previous year’s tax.
This sucks if your income is a lot lower than the previous year. But in that case, you make smaller payments in the later quarters when you have a more accurate calculation.
An alternative method lets you split your quarterly payments proportionally to how much income you earned that quarter. But this one is calculated on the current year’s tax, so a big gain in Q4 still means you owed more tax than expected in Q1.
There is a worksheet in Publication 505 that calculates the exact amount you need to pay for each period after you know your income for the period.
Unfortunately, if you didn’t think you needed it for the first three periods and you use it only for the fourth period, you could still owe a penalty.
However, when that happened to me and I calculated the penalty using Schedule AI, about a year later the IRS refunded the penalty with no explanation, so YMMV.
The current system might have flaws, but think about what would happen if it were eliminated. Then everyone would withhold (or pay estimates) as little as possible, some would have difficulty paying at the final due date, and the government would have an even greater budgeting problem. Maybe we need a hybrid model where cap gains and non-contractual bonuses are calculated separately with an opt-in for taxpayers who wish for this treatment…
You compute/estimate your income by quarters—BUT, it’s not actually quarters as the income due dates are: Jan-Mar due 4/15, Apr-May due 6/17, June-Aug due 9/16, and Sept-Dec due 1/15/26.
You will need to keep records of the income for the periods to properly fill out the IRS form showing what your income was for the various periods.
Prior year safe harbor is an easier way to go: 110% of the prior year’s taxes (for people with higher incomes) made quarterly.
You pay the cap gains in the quarter you generate them (plus an extra 15 days to pay).
It’s a ridiculous scam. I used to have months I’d make zero and other months I’d make 30 grand. Estimated payments are just another way for them to soak us with fees, confusion, and other BS.