Another way to do it is to take 2005 taxes, multiply by 1.10 for 110% and then pay that down as soon as you can. Then you won't have to make any estimated payments for the rest of the year. So in the example, you can just give them $33,000 and then don't worry about it until the following year. You will then file and pay extra if you did better than your first year or you can expect a refund. Either way, you won't have to worry about taxes. The alternative is to obviously pay the interest if you think you can do better than 5% with your money. I think you will need to file extensions in this case.
If you are going to make less than last year, then just underpay your estimated taxes per quarter slightly. No sense in letting the government earn interest on your money throughout the year. If you are going to make more than last year, then just pay your estimated taxes as if you were going to make the same as last year. If you made more than a certain amount you have to pay 110% of last year's taxes to be safe, but I always just pay the same amount as last year and deal with any penalties later. If you can make more than the last year on a consistent basis, then you are in the sweet spot as you can underpay your estimated without penalty. Note that if your trading income is really irregular then you will just have to estimate where you will land come the end of the year (over or under the previous year). If you estimate incorrectly, then you have to readjust the amount you pay on a quarterly basis. If given the choice, I always underpay my estimated and suffer the consequences later. Usually my approximations are not so far off and I end up paying a miniscule penalty.
Based on what I read on the IRS website, your estimated tax is based on the lesser of: Last years income or This years expected income. I didn't make squat last year so I should be good to go until next year. fan27
############ 1] That sounds about right & disciplined hedge [nickname] that very well may work for you ; however you may have noticed, disciplined hedge I am disciplined in my use of words ''overpay a bit '' insures i dont pay them interest-usually. 2] And with all due respect, there seems to be a do it yourself attitude on much of this section and that may work especially if one actually enjoys translating ''fedspeak'' Books & many books of ''fedspeak'' 3] Futurestrader71 had another good suggestion-CPA; its not just that tax laws change from time to time,like home office its that a CPA has your interests in translationg'' fedspeak'' 4] Also they audit some of every group-littleshots,& bigshots; my biggest year perhaps they arent going to audit; but 2002 year they recently[2005] asked for documents.So if you are budgeting IRS interest & or penaltys???, note that. 5] In shopping around for a CPA,one can get a free estimate, & other info free or keep shopping, till you get some free info. 5.5]Agree with Aaron Schindler, paying taxes is a blessing. One of My most unforgettable characters as a teenager was a small businessman/banker/gamebird hunter; that businessman /bank director liked to say; ''a good CPA will pay for himself in a minute''
A consistently profitable trader should not pay estimated taxes. As far as I know the IRS penalty is ~6%. Assuming these 6% are used for trading, they should generate more profits. This is exactly like taking a loan for a year with 6% interest (to be more accurate, these are 4 quarterly loans)
Could anyone tell me how I should report my trading gains on my taxes? I traded about 40 futures contracts and made $700, what's the easiest way to report the gains? Do I have to fill out that 6789 form or whatever? Or can I just put the gain on my capital gains form?? Help!!!!
My main advice on taxes for traders is to get professional help. http://www.greencompany.com is a great place to start. Most chances your regular CPA doesn't know too much about it (like mine) To your question, futures are considered "1256 contracts" and are reported on form 6781 and then quoted on schedule D. The 60/40 rule applies, which means that 60% of your gains are reported as long-term and 40% as short-term.
i agree. add to that the fact if things happen and you have a large drawdown or some great oppertunity you might need that money.
I always thought that trading income was not considered "earned income" and therefore you cannot contribute to a retirement account. On the other hand, you do not have to pay social security or medicare taxes.