Estimated tax payment rule

Discussion in 'Taxes and Accounting' started by farmer0636, Mar 5, 2005.

  1. Hi, I am a new daytrader and have some trading gains in the first two months. I was told to pay my estimated tax obligation on quarterly basis. If I pay the estimated tax now and have loss for the rest of the year, I have to wait for the next year to get the tax return back. What is the easiest way to handle this headache? Thanks in advance.
  2. I could be wrong, but my understanding is that if you didn't have any significant income last year, you won't be fined for not making quarterly payments this year.
  3. Consult an accountant, but this is what I understand (this may only apply to LLC's and corp).

    You don't have to pay any tax in the first year. By April 15th of the second year, you will have to pay your taxes on all of the first year's gains PLUS a quarterly installment for the second year. As long as you pay 110% of the tax you paid on year 1 for the second year, then you will be fine.

    For example, if you made $100,000 in 2005, you will owe tax on that amount minus your deductions come April 15th, 2006. Let's say that liability is $30,000. So on April 15th, 2006, you will pay $30,000 for 2005 PLUS $8,250 for the first quarter of 2006. The $8,250 is $30k x 110% divided by 4. You will pay this $8,250 every quarter.

    The 110% is to avoid the penalty for not paying enough in case you make more. If you feel that you don't have the discipline to put away the money for tax day, then you should pay into your taxes an amount equal to 40% of that quarter's earnings. You will then get money back once you file.

    I hope that helps.
  4. =======

    By far the easiest way, especially with you making
    money''1st 2 months'' is overpay a bit;
    if you underpay =stiff penalty.Maybe differs 1st year?????

    It will pay you to ask tax pro- cause broker sends 1099 to IRS;
    are you planning on loss for rest of year??????

    Not making a prediction, but with you making $$, 1st 2 months;
    dont figure on losing rest of year, & paying no taxes:cool:
  5. From my understanding, there is not a "stiff penalty" if you don't make estimated payments. You basically just pay interest on it to the IRS come full payment time on April 15th.

    Alot of traders choose to do this given their earnings may fluctuate and that they don't want to deal with it until tax day and are willing to pay interest on any underpayment.
  6. Htrader

    Htrader Guest

    I never pay estimated tax during the year. Yeah, it does cost me a significant amount of money in interest, but I just like having that extra money in the bank during the year. Gives me an added sense of security.

    So I figure, if it helps my mental state, then don't mess with it.

    The IRS charges you around +3% higher than the top savings rate rate you could normally get in a bank.
  7. How do you figure the 3% into doing your 1040 come April 15th of the following year? Do you automatically add the 3% or just pay the tax you calculated and let the IRS contact you regarding non-prepayment of tax interest and pay it acordingly?

  8. Htrader

    Htrader Guest

    I just pay the amount I owe without figuring the late penalty.

    Then around June the IRS will send me a bill, showing me what I owe and the interest rate they used to calculate my bill.

    In 2003, I was charged around 5% yearly interest, and thats around 3%higher than the 2% I got with my money sitting in the bank. I'm sure they have an actualy specific rate formula they use. Probably x+libor or something like that.
  9. Appreciate the info!! thanks!
  10. Thank you for the information. It is very helpful.

    #10     Mar 5, 2005