Not Enough Taxes Withhold From Paychecks

[Tiziano]

Due to a large capital gain distribution from a mutual fund, I owe the
IRS additional money for 2007 --and maybe even a tax penalty!
What should one do when finding out that their mutual fund is getting
ready to declare a big capital gain? I mean, what forms do I need to
use in order to estimate my additional taxes? How much time do I have
to pay the additional taxes?
Thanks.

 

[ed]

Due to a large capital gain distribution from a mutual fund, I owe the
IRS additional money for 2007 --and maybe even a tax penalty!
What should one do when finding out that their mutual fund is getting
ready to declare a big capital gain?  I mean, what forms do I need to
use in order to estimate my additional taxes?  How much time do I have
to pay the additional taxes?
Thanks.
--
tb

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Due to the lack of specific information I suggest you read form 2210
and its instructions and/or Publication 505, but probably the folowing
will suffices: Pay an intallment with a 1040-ES voucher NOW which,
when added to your withholding and/or other installments, will be at
least the amount of your 2006 tax (110% of 2006 tax if 2006 AGI was
over $150K), Then, complete a form 2210 and Schedule AI and pay the
remaining taxs due wih your return. You will have a 8% simple
interest penalty for the amuont of the payment you make from Jan 15 to
the date received by the IRS. Next year make the payment by January
15 for NO penalty. Your mutual fund usually has this information by
mid December.

If your withholding generally covers the tax due on your regular
income the above is all that is necessary. If you don't have a big
gain distrbution you can alternatively pay total of 90%of your current
year's tax, whichever is lower. If the gain comes mid year you must
make the ES payment at the end of that tax quarter, unless you can
increase your withholding to meet one of the above "Safe Harbors".
Return for more advice, if you ned it, after reading the above
referrences

ed.

 

[Benjamin Yazersky CPA]

Due to a large capital gain distribution from a mutual fund, I owe the
IRS additional money for 2007 --and maybe even a tax penalty!
What should one do when finding out that their mutual fund is getting
ready to declare a big capital gain? I mean, what forms do I need to
use in order to estimate my additional taxes? How much time do I have
to pay the additional taxes?
Thanks.

But, you should pay attention to 2008 planning now, so you won't owe a
penalty next year.

Some mutual funds make available estimates of their year end
distributions in Oct or Nov.
Use these amounts to do year end tax planning.

With regard to your 2007 cap gain distribution, I'll speculate that it
came at year end.
So, when preparing your form 2210, use the annualization calculation.
That should minimize any penalties.
There are also other safe harbors to avoid underpayment penalties,
such as covering 100/110% of last year or 90% of current year.





<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----





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[rick++]

Due to a large capital gain distribution from a mutual fund, I owe the
IRS additional money for 2007 --and maybe even a tax penalty!

Something called a "safe harbor", i.e. having paid nearly as much
tax as in the previous year, will probably prevent a tax penalty for
2007.

Note that safe harbors generally dont work more than
one year in a row. Once you have a steady stream of untaxed
investment income you have to pay quarterly estimated tax on
it to avoid penalties.

The first 2008 quarter ends 3/31 and is due 4/15.
I usually save a copy of taxcble brokerage statements for the
end-of-quarter months and the that paystub. Then I type
that into the 2210 form in the tax software to see the minimum
tax to avoid a penalty.

 

[ed]

Something called a "safe harbor", i.e. having paid nearly as much
tax as in the previous year, will probably prevent a tax penalty for
2007.

Note that safe harbors generally dont work more than
one year in a row.  Once you have a steady stream of untaxed
investment income you have to pay quarterly estimated tax on
it to avoid penalties.

The first 2008 quarter ends 3/31 and is due 4/15.
I usually save a copy of taxcble brokerage statements for the
end-of-quarter months and the that paystub.  Then I type
that into the 2210 form in the tax software to see the minimum
tax to avoid a penalty.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used,   >>
<< nor can it used, for the purpose of avoiding penalties  >>
<< that may be imposed upon the taxpayer.                  >>
<<                                                         >>
<<   The Charter and the Guidelines for submitting posts   >>
<<  to this newsgroup as well as our anti-spamming policy  >>
<<                  are atwww.asktax.org.                 >>
<<         Copyright (2007) - All rights reserved.         >>
<< ------------------------------------------------------- >>

rick: What software do you use that will compute your installment s
on the annualized income method for the current year? or does
your software just divide last year's tax by 4?

ed

 

[joeu2004]

Once you have a steady stream of untaxed investment
income you have to pay quarterly estimated tax on it to
avoid penalties.

I believe that is incorrect or incomplete.

First, worrying about estimated tax on "untaxed investment
income" is an oxymoron. I presume you mean (investment)
income that is not subject to withholding or, simply, income
from which tax is not withheld (for any of a number of reasons).

Second, if the OP has income subject to withholding, the
OP might be able to avoid making estimated payments (on
income from which no tax is withheld) by adjusting
withholding at any time(s) during the year so that the total
of all withheld taxes covers the annual "safe harbor"
requirements.

I never made estimated tax payments for the 34 years that
I was working. I only had to make estimated payments
after I retired and no longer had sufficient income subject
to withholding to cover "safe harbor" requirements.