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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 1040-ES (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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