Large Gains, Lump-Sum Distributions, etc.
Question: If I anticipate a sizable capital gain on the sale of an investment during the year, do I need to make a quarterly estimated tax payment during the tax year?
Answer:
You must pay estimated tax for the current tax year if both of the following apply:
- You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and refundable credits; and
- You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your current year's tax return, or
- 100% of the tax shown on your prior year’s tax return.* (Your prior year’s tax return must cover all 12 months.)
*Note: Certain taxpayers with higher adjusted gross income must substitute 110% for 100%. If you are making estimated tax payments you can:
- Increase your quarterly estimated tax payments or
- Increase your federal income tax withholding to cover the tax liability. If you have the proper amount withheld, you:
- may not be required to make estimated tax payments, and
- may not have to file Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and Trusts, with your tax return as you would if you just increased the remaining estimated tax payments.
You may be able to annualize your income and make increased estimated tax payments in the later quarters. You would have to file Form 2210 with your tax return because we do not know when you received the income and that you received it unevenly over the year.
Note: Publication 505, Tax Withholding and Estimated Tax, has a "Qualified Dividend and Capital Gains Worksheet" to help estimate the additional tax liability. It is important to remember that the net gain on capital gains is generally taxed at a lower tax rate than your ordinary income.
Additional Information:
- Tax Topic 306, Penalty for Underpayment of Estimated Tax
- Form 1040-ES (PDF), Estimated Tax for Individuals
Category: Estimated Tax
Subcategory: Large Gains, Lump Sum Distributions, etc.
