Re: Estimated taxes, withholding, and uneven income

09-04-2003, 08:16 AM

"Arthur L. Rubin" <ronnirubin[at]sprintmail.com> wrote:
- quote -

> Simon Baldwin wrote:

> > In March, I sold some stock and realized a small short-term
> > capital gain. As the amount of tax due for this sale was
> > less than the amount I'm normally overwithheld on salary for
> > the year, I made no estimated tax payments, but rather left
> > this to be taken care of by withholding.
> > > In June, I sold more stock, and the gain is too much to
> > handle by an increase in withholding, so I'm currently
> > trying to figure out the correct actions to take with
> > estimated tax.
> > > On the face of it, it seems that since my withholding is
> > broadly on track for the rest of my income across the year,
> > I should send in around 33% of this gain for Federal, 9.3%
> > for California -- these being the brackets my AGI is almost
> > certain to fall into -- by Sept 15th. Does this seem right?

> Well, long term capital gains are subject to a maximum
> Federal tax rate of 15% (20% prior to May 5). Due to
> phaseouts, your actual marginal tax rate may be higher.
> Phaseouts can also increase the 9.3% rate for California.
> As I see it, your options are as follows:
> 1. Increase withholding, even if you have to request your
> employer withhold amounts greater than would be withheld
> with a W-4/DE-4 of Single/0 exemptions. As long as your
> withholding exceeds some percentage larger than 100% (110%?)
> of your 2002 taxes or 90% of your 2003 taxes, or all but
> $1000 Federal/$200 California of your 2003 taxes, you're
> covered. No 2210 is required.
> 2. Pay additional withholding by withdrawing money from IRAs
> and redepositing them within 60 days. Sign up for backup
> withholding on investment accounts. Same consequences as
> option 1.
> 3. Pay estimated taxes by September 15 and January 15.
> You'll need to file form 2210 and schedule AI, as well as
> the California equivalents. You're covered as long as the
> cummulative amount paid, either by estimated taxes paid by
> 15 days after each "quarter" (March, May, August, December),
> or withholding paid within the quarter (or 1/4 of the total
> withholding, at your option) exceeds either 27.5% (times the
> number of quarters) times your 2002 tax due, or 22.5% (times
> the number of quarters) of your annualized 2003 tax for the
> specified quarters.
> (I'm assuming that your total annual withholding would not
> meet the calculations from option 1. If it does, you don't
> NEED to make estimated tax payments, although it should be
> noted that state estimated tax payments made in 2003 are
> deductible on your 2003 Federal tax return. This may or not
> be an advantage.)
> The 110%/27.5% can be replaced by 100%/25% if your 2002 AGI
> was less than a certain amount, which seems unlikely given
> your later notes.

Rubin's right on. But you need a calculator to do the 2210
AI properly, particularly this year. Put "2210 tax
calculator" into any search engine to find one. ed

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#-1 09-03-2003, 06:42 AM

Simon Baldwin wrote:

- quote -

> In March, I sold some stock and realized a small short-term
> capital gain. As the amount of tax due for this sale was
> less than the amount I'm normally overwithheld on salary for
> the year, I made no estimated tax payments, but rather left
> this to be taken care of by withholding.
> In June, I sold more stock, and the gain is too much to
> handle by an increase in withholding, so I'm currently
> trying to figure out the correct actions to take with
> estimated tax.
> On the face of it, it seems that since my withholding is
> broadly on track for the rest of my income across the year,
> I should send in around 33% of this gain for Federal, 9.3%
> for California -- these being the brackets my AGI is almost
> certain to fall into -- by Sept 15th. Does this seem right?

Well, long term capital gains are subject to a maximum
Federal tax rate of 15% (20% prior to May 5). Due to
phaseouts, your actual marginal tax rate may be higher.
Phaseouts can also increase the 9.3% rate for California.

As I see it, your options are as follows:

1. Increase withholding, even if you have to request your
employer withhold amounts greater than would be withheld
with a W-4/DE-4 of Single/0 exemptions. As long as your
withholding exceeds some percentage larger than 100% (110%?)
of your 2002 taxes or 90% of your 2003 taxes, or all but
$1000 Federal/$200 California of your 2003 taxes, you're
covered. No 2210 is required.

2. Pay additional withholding by withdrawing money from IRAs
and redepositing them within 60 days. Sign up for backup
withholding on investment accounts. Same consequences as
option 1.

3. Pay estimated taxes by September 15 and January 15.
You'll need to file form 2210 and schedule AI, as well as
the California equivalents. You're covered as long as the
cummulative amount paid, either by estimated taxes paid by
15 days after each "quarter" (March, May, August, December),
or withholding paid within the quarter (or 1/4 of the total
withholding, at your option) exceeds either 27.5% (times the
number of quarters) times your 2002 tax due, or 22.5% (times
the number of quarters) of your annualized 2003 tax for the
specified quarters.

(I'm assuming that your total annual withholding would not
meet the calculations from option 1. If it does, you don't
NEED to make estimated tax payments, although it should be
noted that state estimated tax payments made in 2003 are
deductible on your 2003 Federal tax return. This may or not
be an advantage.)

The 110%/27.5% can be replaced by 100%/25% if your 2002 AGI
was less than a certain amount, which seems unlikely given
your later notes.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

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