Suppose my taxable income is bumped substantially by an event in the

4th quarter (e.g., I take a capital gain, I convert some Regular IRA

assets to Roth in some year other than 2010), the impact of which

could be to double (or greater) the amount of income tax due for the

year.

While my 4th quarter estimated tax payment will be based on this

additional income, can there be a penalty for underpayment of

estimated tax for quarters 1, 2, and 3? On the one hand, I can't be

expected to pay estimated tax on income that I had no way of

reasonably anticipating, but on the other, I don't see on any tax form

any provision for showing when, during the year, I received the income.

The reason it's called estimated tax is because you will estimate your

tax. Suppose you expect to make 14k in W2 income and 1k in qualified

dividends every quarter, and additionally 100k conversion income in

the last quarter. You could just calculate your tax, using W2 income

as 14k*4, qualified dividends as 4k, conversion income as 100k. You

can calculate your state tax first. For example, for CA multiply the

tax by 27% to get the Q1 payment. The state tax you estimate to pay

will become an itemized deduction for federal, but if you make the

last payment on 1/15 of the following year, then that payment will not

be allowed as an itemized deduction for this year.

Or you can use the exact method. This method is tedious because you

have to track your interest, dividends, qualified dividends, stock

sales, etc each quarter.

The Q1 tax is based on income earned in that quarter. Suppose you

make 14k in W2 income and 1k in qualified dividends for Q1. When Q1

is finished (March 30), annualize your income by multiplying by 4 to

get 60k, of which 4k is qualified dividends. Annualize your itemized

deductions too. Calculate the tax, choosing the standard or itemized

deduction, and add any credits to your tax return. Multiply the

result by 22.5% to get the minimum estimated payment. The ratios are

different for different states, like for Q1 in CA you multiply by

27%. Only for the Q4 return, you have additional income of 100k.

Anyway, you wouldn't make an equal amount every quarter because the

first quarter is 3 months, the second is 2 months, etc.