How often does one need to pay their short-term capital gains taxes? Quarterly? Annually with their tax return? Thanks! Mr. Toad
I pay every quarter. The last two years I got dinked for not witholding enough, so this year I put in 80% of Q1's profits. Maybe that'll keep the hounds at bay.
With regards to estimated taxes, when does the IRS sent you the bill if you didn't pay quarterly taxes for 2001 and instead paid it all in April?
As long as you pay 100% of your 2001 tax liability if you earned under 150K in 2001 there will be no penalty no matter how much you make this year. If you made over 150K then you must pay 112% of your 2001 taxes in estimated payments to avoid any penlites. Or if you can estimate your income for this year you could pay 90% of your current years liability to avoid penalty. This may be very hard for most traders. So last year you owed 20,000 to the IRS, send them a check for 5 grand each quarter. The second concept you should know about is annualization. Simply put, if most of your gains came in December as opposed to evenly through the year you would be justified in paying a large fourth qtr payment having skimped on the other three. This in most cases will trigger a penalty, however if you use the annualization function on most tax software you can wipe this out most of the time. Finally, don't forget most states with state income tax require you to file estimated payments as well. And their penlites are usually more wicked than the IRS. So it pays to check the safe harbor rules for your State.
So you are saying that as long as I made under 150k last year, which I did, then I don't have to worry about estimated taxes? Thats doesn't seem right since the IRS Pub 505 says that as long as I expect to pay over $1000 in taxes in 2002 and have less than 10% withholding, then I need to pay estimated taxes.
What I am saying is if you make under 150K, as long as you pay 100% of last years tax as ES you will pay no penlites. As an example Lets say last year you made 100K and paid 15K in taxes. This year you make 200K and your tax bill is 30K as long as you paid in 15K in taxes by April 15 2003 you will not pay any underpayment penalty. These are called the Safe Harbor Rules if you want to reference them. But the bottom line is the simplest way to take the guess work out of ES is to take your 2001 return both Federal and State and divide the tax liability by 4 and pay that each quarter.
I went looking and I found that I need to put in 110% of last year's payments to avoid penalties. I wish I could predict my yearly income so the IRS would stop sending me those nasty little assessments. Now that I know about this provision, I'll send it in and give the govt. a interest-free loan. (Not likely my income this year will be as high as last years...volatility is too low). Here's where I found an article on safe harbor rules: http://money.msn.com/articles/tax/basics/1408.asp
Acray, just a thought and I am in the same boat as you in that my income this year will be less than last. As long as you have 100% of your tax paid by April 15 you will be fine. So no interest free loan. So if last year you made 200K and paid 30 in taxed but this year you will only make 100 and owe 15 in tax, you will have had to pay 15k by April 2003. And don't forget to look at the annualization method for computing this. So lets say we get a huge rally/collapse at year's end, you could back end load your ES and pay a chunk on Jan 15. Hope this helps, but as long as my tax dollars are going for sheets for statues and .16 per pound for sugar that sells on the open market for .04 I like to keep as much in my pocket as I can.