Large Gains, Lump-sum Distributions, etc.
This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
I received a lump-sum distribution from a retirement account, but no taxes were withheld. How do I determine whether estimated taxes should be paid?
You should obtain Form 1040ES (PDF), Estimated Tax for Individuals, to help you figure your estimated tax liability. Since this situation involves a lump-sum distribution, you may qualify for the ten-year tax option. Lump-sum distributions must meet specific requirements to qualify for optional tax treatment. However, beginning in 1995, a participant born after 1935, who has reached age 59 1/2 at the time the distribution is made, may be able to use the 5-year tax option. Thus, you may also need Form 4972 (PDF), Tax on Lump-Sum Distributions, to make an accurate estimate of your income tax liability.
References: I will be taking a Required Minimum Distribution (RMD) at the end of the year on my IRA. Is estimated tax due when the distribution is made or is 1/4th due with each estimated tax submission?
The tax on the distribution is not due until you actually receive the income. Thus, your last fourth quarter estimated tax payment should reflect the increase in your tax liability. You could still increase your quarterly estimated tax payments or increase your Federal income tax withholding during the earlier part of the year to cover the tax liability.
If you have the proper amount withheld, you may not be required to make estimated tax payments nor have to file Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and Trusts, with your tax return (as you would if you just increased the last estimated tax payment). If you wait and make an increased estimated tax payment for the fourth quarter, you would have to file Form 2210 with your tax return because we do not know when you receive the income. Since you did not receive the income evenly throughout the year, you have to tell us when the income was received by filing Form 2210.
References: - Publication 505 (PDF), Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and Trusts
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?
If you first receive income subject to estimated tax during a period other than the first quarter, you must make your first payment by the due date for the period the income is received. You can pay your entire estimated tax by the due date for the period the income is received, or you can pay it in installments by the due date for that period and the due dates for the remaining periods.
If you are making estimated tax payments you can increase your quarterly estimated tax payments or increase your Federal income tax withholding to cover the tax liability. If you have the proper amount withheld you may not be required to make estimated tax payments nor have to file Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and Trusts, with your tax return (as you would if you just increased the remaining estimated tax payments). If you wait and make increased estimated tax payment in the later quarters, you would have to file Form 2210 with your tax return because we do not know when you received the income. Since you really did not receive the income evenly throughout the year, you have to tell us when the income was received by filing Form 2210.
References: - Publication 505 (PDF), Tax Withholding and Estimated Tax
- Form 1040ES (PDF), Estimated Tax for Individuals
- Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and Trusts
- Tax Topic 306, Penalty for Underpayment of Estimated Tax
If I sell stock at a gain, do I pay estimated taxes on the entire profit when the next quarterly payment is due or can I divide it by the number of quarterly payments left for the year and make these equal payments at each subsequent quarter?
If you first receive income subject to estimated tax during a period other than the first quarter, you must make your first payment by the due date for the period the income is received. You can pay your entire estimated tax by the due date for the period the income is received, or you can pay it in installments by the due date for that period and the due dates for the remaining periods.
References: Since mutual fund distributions are typically made in the last quarter of a calendar year, is it sufficient to pay income taxes on the distributions by January 15th, or am I required to make quarterly estimated tax payments?
You do not have to make estimated tax payments until you receive income on which you will owe the tax. Since your mutual fund distributions are not made until the last quarter of the year, you need only make an estimated tax payment for the last quarter by January 15th. However, even if you make an adequate payment of tax by January 15th, you should also complete Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and Trusts, and attach it to your income tax return when you file, you may be assessed an estimated tax penalty by the IRS service center when your return is processed, otherwise because estimated tax payments are normally made in four equal installments and the IRS will not know your liability occurred in the fourth quarter. You should check the box on the front page of the Form 2210 to select the Annualized Income Installment method, and then complete Schedule AI on page 3. When you compute the penalty on page 2 of that form using the numbers from Schedule AI, your penalty will be $0 if you made an adequate payment. Even if you did not make the January 15th payment, or made an inadequate payment, the annualized income method on Form 2210 may significantly reduce the estimated tax penalty.
References: - Publication 505 (PDF), Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and Trusts
On December 20, I received a large mutual fund distribution. Due to the large distribution I'm going to owe $7,000 when I file my return. Is it okay to just pay the $7,000 when I file my return?
If the $7,000 in tax is a result of a distribution not covered by prepayments of tax, either through income tax withholding or estimated tax payments, you should make an estimated tax payment by January 15th of the next year. If you wait to pay the $7,000 with your return, you may be penalized for an underpayment of estimated taxes. Even if you make an adequate payment of tax by January 15th, you may be assessed an estimated tax penalty by the IRS service center when your return is processed unless you file Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and Trusts . This is because estimated tax payments are normally made in four equal installments and the IRS will not know your liability occurred in the fourth quarter unless you explained when the income was received.
You may be subject to the penalty if you owe at least $1,000 in tax after subtracting your withholding and credits from your tax liability, and you did not prepay at least 90% of your current year's tax or 100% of your previous year's tax. (The latter percentage is higher for higher-income taxpayers with adjusted gross incomes from the previous year of more than $150,000.)
If you make an adequate payment by January 15th but made no earlier estimated tax payments, use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and Trusts, to compute your penalty. Check the box on the front page selecting the Annualized Income Installment method, and then complete Schedule AI on page 3. When you compute the penalty on page 2 of that form using the numbers from Schedule AI, your penalty will be $0 if you made an adequate payment. Even if you did not make the January 15th payment or made an adequate payment, the annualized income method on Form 2210 may significantly reduce the estimated tax penalty.
For more information on estimated tax payments and the underpayment of estimated tax penalty, refer to Publication 505 (PDF), Tax Withholding and Estimated Tax.
References: - Publication 505 (PDF), Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and Trusts
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