in chp 2 of pub 505? it defines expected AGI as total income minus expected adjustments. but it then defines total income as "Total income includes all income and loss for 2019 that, if you had received it in 2018, would have been included on your 2018 tax return in the total on line 6 of Form 1040." how are traders supposed to know in march, what their total income will be for that year? they keep alluding to using the previous year as a reference, in which case this just goes back to the 110% method mentioned earlier. your workaround is neat i will admit.
I would have to go back to look up the details, but basically there's a way you can account for all your money coming in during Q4. Maybe search for inheritances or something because I think that's what it is kind of designed for. Keep in mind that you would have to actually be in that situation. If you made $100K in Feb, lost $100K in July, and made $100K again in Dec you couldn't claim that you made all your money in the Q4 (although the W-2 workaround would make it a moot point).
This is why they are called estimated taxes, because you won't know until the calendar year is over how much you will owe. If you pay too much, you'll get a refund but the IRS will get a little interest on that amount before they give it back. If you pay too little, you will pay penalties. In the grand scheme of things, percentage-wise it doesn't really matter a huge amount to your bottom line. If you start out the year in the hole, then maybe you don't pay any estimated taxes for the first quarter. But what if you then kill it for the rest of the year? Well then you need to start paying quarterly estimated taxes at that point. Note that if your income is severely irregular, then the Annualized Income form for calculating estimated tax penalty is probably the way to go. It takes into account how much money you made during each quarter of the year when calculating penalties. Unfortunately, it is also a lot more complicated to fill out and you have to have good records of when all your income was made during the year. The only time you won't pay penalties and won't get a refund is when you've paid safe harbor estimated taxes (100% or 110% of the previous year) and you've made more money than the previous year such that you owe more than what you paid in estimated. In that case the safe harbor kicks in and protects you from penalties.
since trading is a job that relies on capital to generate revenue, capital to us is like inventory. overpaying estimated quarterly taxes can have a disastrous effect on our yearly performance. shouldn't most traders go with Annualized Income installment method then to avoid a situation of sacrificing capital early on in the year (paying taxes) on "expected" future profits that may never come to fruition?
Yes, the Annualized Income method is designed just for the type of irregular income stream that traders produce.