Estimated Tax
This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
9.4 Estimated Tax: Large Gains, Lump-sum Distributions, etc.
I received a lump-sum distribution from a retirement account, but
no taxes were withheld. How do I determine whether estimated taxes should
be paid?
You should obtain Form 1040ES (PDF), Estimated
Tax for Individuals , to help you figure your estimated tax liability.
Since this situation involves a lump-sum distribution, you may qualify for
the ten-year tax option. Lump-sum distributions must meet specific requirements
to qualify for optional tax treatment. Thus, you may also need Form 4972 (PDF) , Tax on Lump-Sum Distributions , to make an accurate
estimate of your income tax liability.
References:
I will be taking a Required Minimum Distribution (RMD) at the end
of the year on my IRA. Is estimated tax due when the distribution is made
or is 1/4th due with each estimated tax submission?
The tax on the distribution is not due until you actually receive the income.
Thus, your last fourth quarter estimated tax payment should reflect the increase
in your tax liability. You could still increase your quarterly estimated tax
payments or increase your Federal income tax withholding during the earlier
part of the year to cover the tax liability.
If you have the proper amount withheld, you may not be required to make
estimated tax payments nor 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 last estimated tax payment). If you
wait and make an increased estimated tax payment for the fourth quarter, you
would have to file Form 2210 with your tax return because we do not know when
you receive the income. Since you did not receive the income evenly throughout
the year, you have to tell us when the income was received by filing Form
2210.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment
of Estimated Tax by Individuals, Estates and Trusts
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?
If you first receive income subject to estimated tax during a period other
than the first quarter, you must make your first payment by the due date for
the period the income is received. You can pay your entire estimated tax by
the due date for the period the income is received, or you can pay it in installments
by the due date for that period and the due dates for the remaining periods.
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 nor 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). If you wait and make increased estimated
tax payment 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. Since you
really did not receive the income evenly throughout the year, you have to
tell us when the income was received by filing Form 2210.
References:
If I sell stock at a gain, do I pay estimated taxes on the entire
profit when the next quarterly payment is due or can I divide it by the number
of quarterly payments left for the year and make these equal payments at each
subsequent quarter?
If you first receive income subject to estimated tax during a period other
than the first quarter, you must make your first payment by the due date for
the period the income is received. You can pay your entire estimated tax by
the due date for the period the income is received, or you can pay it in installments
by the due date for that period and the due dates for the remaining periods.
References:
Since mutual fund distributions are typically made in the last quarter
of a calendar year, is it sufficient to pay income taxes on the distributions
by January 15th, or am I required to make quarterly estimated tax payments?
You do not have to make estimated tax payments until you receive income
on which you will owe the tax. Since your mutual fund distributions are not
made until the last quarter of the year, you need only make an estimated tax
payment for the last quarter by January 15th. However, even if you make an
adequate payment of tax by January 15th, you should also complete Form 2210 (PDF), Underpayment of Estimated Tax by Individuals,
Estates and Trusts, and attach it to your income tax return when you
file, you may be assessed an estimated tax penalty by the IRS service center
when your return is processed, otherwise because estimated tax payments are
normally made in four equal installments and the IRS will not know your liability
occurred in the fourth quarter. You should check the box on the front page
of the Form 2210 to select the Annualized Income Installment method, and then
complete Schedule AI on page 3. When you compute the penalty on page 2 of
that form using the numbers from Schedule AI, your penalty will be $0 if you
made an adequate payment. Even if you did not make the January 15th payment,
or made an inadequate payment, the annualized income method on Form 2210 may
significantly reduce the estimated tax penalty.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment
of Estimated Tax by Individuals, Estates and Trusts
On December 20, I received a large mutual fund distribution. Due
to the large distribution I'm going to owe $7,000 when I file my return. Is
it okay to just pay the $7,000 when I file my return?
If the $7,000 in tax is a result of a distribution not covered by prepayments
of tax, either through income tax withholding or estimated tax payments, you
should make an estimated tax payment by January 15th of the next year. If
you wait to pay the $7,000 with your return, you may be penalized for an underpayment
of estimated taxes. Even if you make an adequate payment of tax by January
15th, you may be assessed an estimated tax penalty by the IRS service center
when your return is processed unless you file Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and
Trusts . This is because estimated tax payments are normally made in
four equal installments and the IRS will not know your liability occurred
in the fourth quarter unless you explained when the income was received.
You may be subject to the penalty if you owe at least $1,000 in tax after
subtracting your withholding and credits from your tax liability, and you
did not prepay at least 90% of your current year's tax or 100% of your previous
year's tax. (The latter percentage is higher for higher (110 %) ($75,000 if
MFS) income taxpayers with adjusted gross incomes from the previous year of
more than $150,000.)
If you make an adequate payment by January 15th but made no earlier estimated
tax payments, use Form 2210 (PDF), Underpayment
of Estimated Tax by Individuals, Estates and Trusts, to compute your
penalty. Check the box on the front page selecting the Annualized Income Installment
method, and then complete Schedule AI on page 3. When you compute the penalty
on page 2 of that form using the numbers from Schedule AI, your penalty will
be $0 if you made an adequate payment. Even if you did not make the January
15th payment or made an adequate payment, the annualized income method on
Form 2210 may significantly reduce the estimated tax penalty.
For more information on estimated tax payments and the underpayment of
estimated tax penalty, refer to Publication 505, Tax Withholding and
Estimated Tax.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment
of Estimated Tax by Individuals, Estates and Trusts
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