Next one is due in a few days. I don't understand these installment payments - i.e. how is a person suppose to guesstimate/predict one year's worth of future capital gains?
I'm not a tax expert. This should not be construed as legal or financial advice.
I don't do installment payments myself since I adjust my salary withholding to cover at least the minimum required to avoid penalties. This is how I believe it to work though.
Each year you must pay at least 90% of the current year's estimated tax liability or 105% (the percentage fluctuates but someone posted this number earlier so I'll take it as given) of the previous year's liability. You can do this through withholding, estimated payments, or a combination of the two.
If you make estimated payments, then each quarter you annualize your year-to-date income and pay the appropriate taxes for the correct fraction of that amount. If your income varies drastically from quarter-to-quarter then you can do some sort of averaging/smoothing, but I don't fully understand that. If you don't pay enough in a quarter then you will be charged penalties and interest even if in the next quarter you overpay to make up for the deficit.
With withholding, no matter when the taxes are withheld from your salary they are considered to have been withheld evenly throughout the year (unless you elect otherwise). This means that you can have your entire paycheck withheld at the end of the year, if you so desire, to cover a massive cap gain in the first quarter. The "even" withholding when combined with averaging/smoothing for large income changes make the withholding option more flexible.
If you work a salaried job then, IMHO, the best thing to do is to figure out what 105% of your previous year's liability would be and adjust your withholding to cover this amount. If, toward the end of the year, you realize that 90% of the current year's liability is significantly less then 105% of the previous year's liability then you can always slash your withholding. I'd recommend taking the most allowances you can without IRS notification (9 or 10, I believe) and then having a large additional amount withheld. This will result in your withholding consisting of a smaller variable portion based on that paycheck's amount and a larger fixed portion.
I think the first estimated payment for fiscal 2000 is due on April 17 (since the 15th is a Saturday). The one due in January is for the fourth quarter of 1999. |
