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Every year, when paying my taxes, I typically get a small amount back from the Feds, and usually pay "less than $400" to my state. However, within this 2016 year, I unexpectedly made a large amount of short-term capital gains day-trading on the stock market, let's say about $20k+, without filing any Form 1040-ES, or doing any special withholding beyond what my employer withholds. So I had to pay thousands in short-term capital gains taxes at the end of the year, but I believe I met an exception of it being unexpected when filing, at least just for this year alone, so I don't think I will be penalized (beyond normal taxation).

However, next tax year (2017), say if I theoretically owe the Feds+state tens of thousands of dollars worth of short-term gains taxes again (come up short on estimated withholding), which is not my normal expected income, would I be penalized? I read something about filing form 1040-ES, but this is unexpected income and I can't predict the future, in fact I could lose -20k during 2017. If I do need to pre-pay/withhold/estimate, is there anyway to pay Uncle Sam money immediately after every Short-Term sale?

  • I can never estimate this, I just pay the penalty, it is a negligible penalty to me in comparison to what I either get back from the government or pay to the government – CQM Mar 5 '17 at 5:24
  • Note the requirement to make estimated payments is the same for all unwithheld but taxable income -- both short and long capital gains, and other things like winning the lottery -- although the tax rate is lower for long gains and thus for the same actual income the tax and estimated payment is less. – dave_thompson_085 Mar 5 '17 at 18:03
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The safe harbor provision is based on the tax you or the prior year. So in 2016 this helped you as your tax was substantially increased from 2015. However, by the same token in 2017 your safe harbor amount is going to be very high. Therefore if 2017 is similar you will owe penalties.

The solution here is to make estimated tax payments in the quarters that you realize large gains. This is exactly what the estimated tax payments are for. Your estimate tax payments do not have to be the same. In fact if you have a sudden boost in earnings in quarter 3, then the IRS expects that quarter 3 estimated tax payment to be boosted.

  • I had a feeling this is what I needed to do, and was planning on doing this, but needed to hear it from someone else, thanks to all. – TheFrack Mar 5 '17 at 17:00
  • I actually found that my tax preparer had provided me four Form 1040-ES vouchers in equal (LARGE) amounts that they said I need to mail to the IRS each quarter, but it's looking less and less like I will have any short-term gain at all this quarter, wondering if I can pay less on no short-term gain, considering it's like 3 months rent! – TheFrack Mar 5 '17 at 17:08
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My understanding (I've never filed one myself) is that the 1040ES is intended to allow you to file quarterly and report unpredictable income, and to pay estimated taxes on that income.

I was in the same sort of boat for 2016 -- I had a big unexpected income source in 2015, and this took away my Safe Harbor for 2016. I adjusted my w-2 to zero exemptions (eventually) and will be getting a refund of about 1% of our income.

So lets say you make 10000 in STG in March, and another 15000 in STG in April. File a quarterly 1040-ES between March 31 and April 15. Report the income, and pay some tax. You should be able to calculate the STCG Tax for 10k pretty easily. Just assume that it comes off the top and doesn't add at all to your deductions. Then for April, do the same by June 15.

Just like your W-2 is used to estimate how much your employer should withhold, the 1040ES is designed to estimate how much extra you need to pay to the IRS to avoid penalties. It'll all get resolved after you file your final 1040 for the 2017 calendar year.

  • The 'quarters' for estimated US income tax are not the normal calendar quarters: it's Jan-Mar by Apr 15, Apr-May by June 15, June-Aug by Sep 15, Sep-Dec by Jan 15. – dave_thompson_085 Mar 5 '17 at 18:05
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Assuming U.S. law, there are "safe harbor" provisions for exactly this kind of situation. There are several possibilities, but the most likely one is that if your withholding and estimated tax payments for 2016 totaled at least as much as your tax bill for 2015 there's no penalty.

For the full rules, see IRS Publication 17.

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