4dtvman[at]verizon.net (4dtvman) writes:

- quote -

Neither did I. In January the taxpayer sold a stock that
will result in his owing an additional $20,000 when he files
this year's taxes. Instead of making estimated tax payments
he invests the $20,000 until it's next April and he has to
pay the tax.

- quote -

I was looking at this as a one-time gain, not someone who
was going to play until he hit the jackpot or lost
everything. In your scenario, anything is possible.

One who invests in this manner can calculate ES tax for each
payment, with the ES payment fluctuating with the investment
results. This greatly lessens the possibility of a penalty
or a sizeable overpayment. Or one can just pay the penalty.
In either case, I'd suggest making sure that the money
needed to pay the taxes is "safe" as of December 31. You
could be sailing along beautifully that date, keep the money
in the risky investments, lose it all on January 2, and come
April 15 owe both a penalty and the underlying tax that you
don't have the money to pay.

Phil Marti
Topeka, KS

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

philmarti[at]aol.com (Phil Marti) wrote:
- quote -

Please note that I never said anything about investing tax
money owed from a previous year. That would be dumb like you
you are implying. However, I'm talking about money earned
within the same calendar year.

Okay, with that in mind, let's say he owes $28,000 because
of a $100,000 capital gain and because he's in the 28% tax
bracket. He subsquently loses the $28,000 on a bad
investment before the end of the year. Well, now he just
owes $20,160 because his capital gain has been reduced to
$72,000. He pays the $20,160 out of his remaining $72,000
capital gain. If he loses more or all of the $72,000, he
owes less or even nothing. Where's the problem?

- quote -

See my explain above. I still don't see the problem.

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

Vic Dura wrote:

- quote -

Some folks who play this game are unable to come up with the
taxes due on April 15th and some have no problem. I
generally favor T-Bills to park funds that will be needed to
pay taxes.

--
Frederick E. Jorden http://Tax-Accounting-Payroll.com
7825 Midlothian Tpk - 207 Richmond, VA 23235-5247
EMAIL knowtax[at]bigfoot.com
(804) 320-6210 FAX (804) 320-6211

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

- quote -

Some, if not many people, do indeed do this. If you don't
mind paying the penalty, I don't think the IRS minds
collecting it.

--
To reply to me directly, remove the XXX characters from my
email address.

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

"4dtvman" <4dtvman[at]verizon.net> wrote:

- quote -

Please tell us where you can get a 15% to 20% rate of return
without a substantial risk of loss of investment.

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

4dtvman[at]verizon.net (4dtvman) writes:

- quote -

Here's another example. Taxpayer put the $20,000 he needed
to pay the tax on an extraordinary gain in Lucent. Lucent
tanked. Taxpayer didn't have the money to pay his taxes
come April.

Only a fool would put money needed within a year someplace
capable of earning 20% before it's needed. Any place safe
enough to keep this money isn't going to earn 5%, so you'll
be out some money on the deal. Whether it's worth it to you
or not is your business.

Phil Marti
Topeka, KS

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

4dtvman wrote:

- quote -

Good question. If you're subject to payroll withholding,
you fill out the W-4 under penalty of perjury, and the
5% "interest" penalty is non-deductible, even as
an investment expense, but if you really are making 15-20%
on your investments, there's no real reason to pay
estimated taxes....

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

4dtvman wrote:

- quote -

Many people, in fact, do conclude that it is easier to skip
estimated payments and simply pay whatever is owed, plus
underpayment penalties, on April 15th. Still, as a matter of
tax policy, I wouldn't support the elimination of "pay as
you go" requirements - but I would definitely favor
simplification of the rules.

MTW

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

I know that sounds like a dumb question, but if you owe
estimated taxes because of capital gains throughout the
year, why not just keep your money working for you and just
pay (and let the IRS figure for you) the 5% penalty when you
file your return? If you are getting 15% to 20% return on
your investments, why take money out of those investments to
pay estimated taxes in an attempt to avoid a 5% interest
penalty?

Here's an example. Let's say you incur a $1000 tax bill in
the first quarter on an investment in which you are making
20% gains per year. You could go ahead and send that money
in to avoid a 5% penalty for the last three quarters ($1000
X .05 X .75) totaling $37.50. Or you could just go ahead and
keep that money drawing the 20% for the last three quarters
($1000 X .20 X .75) for a total of $150. Now, you would have
to pay the $37.50 penalty when you file and your taxes on
the $150 (in the 35% tax bracket) would be $52.50. That
would still leave you with $60 ($150 - $37.50 - $52.50) that
you wouldn't have had by just paying the estimated taxes.
Even if there's a subsequent penalty assessed on the $150 of
$5.63 (150 X .05 X .75), you would still be left with
$54.37.

Am I missing something here? It seems to me that the
government's rules on estimated taxes/penalties for capital
gains is counterproductive both to the government itself and
to individual tax-payers. In the example above, many people
would go ahead and pay the $1000 to avoid the penalty. The
rules encourage them to do this, but by doing so, they are
cheating themselves AND the government out of money. If
these rules were abolished, that person would end up keeping
an additional $97.50 ($150 - $52.50) and the government
would get an additional $52.00 in tax revenue by letting
that person hold on to their money longer. In addition, the
rules are way too complicated and cause major inconveniences
for tax-payers and IRS employees alike.

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