Tax Help: Estimated Payments

This is one in a series of tax questions from readers answered by local members of the California Society of Certified Public Accountants, to help with your 1999 and 2000 tax issues.

Q: When I worked for a company in 1998, I received a W-2 form showing federal income tax withheld on my income. In 1999, I didn’t have any earned income, so I decided to sell several mutual funds that I have held for many years. I heard that I have to pay a penalty to the IRS because I didn’t make an estimated tax payment when I sold these funds. This does not seem fair. How do I know the tax amount to pay in advance before I know what I am selling?

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A: The law requires taxpayers to make estimated tax payments if withholding from wages is not sufficient to pay their annual income tax bill. You do not need to know tax amount in advance, but sales of investments may trigger the need for estimated tax payments. If you don’t make the payments and don’t qualify for certain exceptions, then you have to pay the penalty. You can avoid the penalty if your tax liability for 1999 after withheld taxes is less than $1,000. You can also avoid the penalty if you paid taxes in 1999 equal to at least 90% of your 1999 tax or--if your income is less than $150,000--equal to at least 100% of your 1998 tax. (The percentage is higher for higher-income taxpayers.)

People who know in advance that their income is likely to be received unevenly throughout the year can also avoid the penalty by paying estimated taxes using the annualized income method. This last method, which “smooths out” your income as if it were received evenly throughout the year, would probably benefit you in the future because your income is received more heavily in one part of the year. If you don’t qualify for one of the exceptions, you can use Form 2210 to figure your penalty, or simply allow the IRS to figure the penalty for you and bill you for the amount. Your best bet to avoid the penalties in the future is to make sure you pay at least 90% of the prior year’s taxes or use the annualized income method.

--John Stoller, CPA, Encino

To find a certified public accountant, visit https://www.calcpa.org. Questions and answers will also be posted on The Times’ Web site at https://www.latimes.com/taxes.