How do you guys make the right estimated tax payments to avoid paying underpayment penalty given the volatile and unpredictable nature of trading for living? I trade full-time (not qualified for TTS). I didn't make much money and got a refund in 2016. My profit spiked in 2017 (AGI ~$120k) but I still made the same estimated tax payments as 2016 so I'm pretty sure I'm underpaying and owe tax at this point. Do I have to pay a underpayment penalty or I'm exempt from it this year? Should I make a big estimated tax payment on January 16 or wait till I file my tax in April? Thanks!
Google "Estimated tax safe harbor" Example, from Forbes mag: Estimated tax safe harbor rule. If your 2016 adjusted gross income (AGI) was more than $150,000 ($75,000 if you are married filing a separate return), you must pay the smaller of 90% of your expected tax for 2017 or 110%* of the tax shown on your 2016 return to avoid an estimated tax penalty.
You are filing a 1040. You are an individual (or joint) taxpayer. Your trading account(s) are titled either as an individual or jointly. Without TTS and/or an entity, you have capital gains income only(based on your post). Capital gains are not earned income, are not subject to SE/FICA, and estimated tax payments is not necessary. The IRS lets any taxpayer, individual or entity pay estimated, but it is not necessary in this case due to the nature of the income. As always, consult with a trading tax professional who understands ALL of your reportable income and expenses.
This is 100% wrong. You're conflating the requirement to pay FICA taxes with the requirement that you withhold at least 90% of the income tax due or meet the safe harbor requirement. You're correct that you don't have to pay FICA tax, however that in no way relieves you of the second requirement. You may be interested to read this FAQ on the IRS's web site (https://www.irs.gov/faqs/estimated-tax) If I anticipate a sizable capital gain on the sale of an investment during the year, do I need to make a quarterly estimated tax payment during the tax year? Answer: You must make estimated tax payments for the current tax year if both of the following apply: You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits, and You expect your withholding and refundable credits to be less than the smaller of: 90% of the tax to be shown on your current year's tax return, or 100% of the tax shown on your prior year’s tax return. (Your prior year’s tax return must cover all 12 months.) As @algofy told you in Jan "@tiddlywinks This is at least the second thread I've seen you give grossly inaccurate tax advice. Can you please stop it and just don't talk about tax matters. algofy" I second that, this makes it at least the third thread of grossly inaccurate tax advice!
Keep in mind that in general paying the estimated taxes on Jan 16th isn't going to help a lot, since the IRS will divide the amount you owe by 4 and assume you should have paid 1/4 in each quarter, charging interest based on that date. So even if you paid the entire estimated amount on Dec 31st, you'd still owe penalties and interest on each of the other 3 quarters. One clever way around this is to ask your employer to withhold the amount you estimate you'll need from your last couple paychecks of the year as an additional withholding. The IRS treats these payments differently such that you don't face that Q1-Q3 penalty and interest. Too late for 2017, but may be useful going forward. Also, there is a special form you can fill out if you can show the capital gains actually occurred at the end of the year, but that really only helps someone who isn't a trader and made their single stock sale in Q4.
Sorry. Been ages since I was a non-TTS individual taxpayer. Moderator... my post above (from Tiddlywinks) is 100% incorrect. If possible, please delete it.
I know of at least one legal way - become a Puerto Rico resident for 6 months a year, and file their Act 22 form. Then you would only have to pay 4% total tax (local and federal). You might want to wait a couple years for the the infrastructure to return to normal before moving.
I stand corrected, I've actually cited that caveat before and should have known better than to use the "no way" modifier! Somehow I think DeltaRisk wasn't thinking of that route though.
Many years ago I worked with a guy who had every tax loophole figured out and spouted the advice to anyone who would listen. Even had his car registered in Wyoming or Montana, I forget, but it wasn't here in Illinois. One day he didn't make it in and we learned that every asset he had was seized. I doubt he gets out in my lifetime. Get a qualified tax professional - worth their weight in gold. I will give you one other piece of advice. Guilty until proven innocent in tax court.