safe harbor: http://www.irs.gov/publications/p17/ch04.html "Estimated tax safe harbor for higher income taxpayers. If your adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you must deposit the smaller of 90% of your expected tax for 2010 or 110% of the tax shown on your 2009 return to avoid an estimated tax penalty."
I appreciate this quote, and this is what I am going to fall back on for this year, but lets just say (and humor me here) that my daytrading income stops here at 300K$ for this year, and next year my income goes up to 500K$ then my question is, can I invoke safe harbor AGAIN and say that I only paid taxes on that 300K$? (or 110% actually, so 330K$?) I don't see anything that says that I CANNOT use safe harbor two consecutive years for increasing trading income, and that is the question I am trying to answer here. g
Though, waiting until your 1099 and not paying estimated taxes means you end up paying less than 1% more in federal taxes. That is to say, the penalty rate annualized and added to your tax rate ends up being less than 1% more in total tax rate with the current penalty rate @ 4%. Do the math using form 2210 and you'll see what I mean. Or Q1 = amount annual tax owed x .25 x (penalty rate) Q2 = amount annual tax owed x .25 x (penalty rate) x .75 Q2 = amount of annual tax owed x .25 x (penalty rate) x .5 Q4 = amount of annual tax owed x .25 x (penalty rate) x .25 Add each quarter's penalty up, add it to you calculated annual tax bill, and you'll see that the percentage increase is small. Under 1%. And should the penalty rate rise to, say 10%, it's still under 2% more. Sure, no one wants to give extra money to the IRS. But consider your cash flow. Consider a losing quarter and what you could have done had you had that money. Consider that you could possibly do better with that money in your hands than in the IRS's. Consider that when you overpay, you don't get that money back until after you fine an annual return and the IRS doesn't pay you interest. Remember, as a trader, you have no idea what you'll make until you have actually made it. Your 1099 tells you that story. It's not a crime to not pay estimated taxes. It's only a crime to not pay your annual tax which carries much stiffer interest penalties. Not to mention jail time if you keep that up.
Hey, why do you keep saying "expensive" CPA? I'm a CPA and I'm not expensive As a note, if any of you happen to have a job where you receive a W-2, you know you can manipulate your withholdings at anytime by filling out a new W-4. You can put a custom amount for how much you want withheld or even change your exemptions. The main thing is, amounts withheld on your W-2 are counted as if they are withheld evenly throughout the year. So if you pay nothing to the IRS and then on your final paycheck of the year have 50k withheld, the IRS counts that has having the 50k withheld evenly throughout the year. Circular 230 Notice: In accordance with Circular 230, please note that any tax advice given herein (and in any attachments) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.