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Large Gains, Lump-Sum Distributions, etc.

Question: 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.)   

There are special rules for:

  • Farmers and fishermen
  • Certain household employers
  • Certain higher income taxpayers
  • Nonresident aliens

You may be able to annualize your income and make an estimated tax payment or an increased estimated tax payment for the quarter in which you realize the capital gain. You would have to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, with your tax return to show us that your uneven estimated payments match up with the income that you received unevenly over the course of the year.

If you are making estimated tax payments and have federal income tax withholding, 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 need to make estimated tax payments and may not have to file Form 2210 with your tax return as you would if you only increased the remaining estimated tax payments.

Note: Publication 505, Tax Withholding and Estimated Tax, has a "Qualified Dividend and Capital Gains Worksheet" to help estimate the additional tax liability. It is important to remember that the tax rate on net capital gains is generally lower than the tax rate on ordinary income.

Additional Information:


Category: Estimated Tax
Subcategory: Large Gains, Lump-Sum Distributions, etc.

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The OMB number for this study is 1545-1432.
If you have any comments regarding this study, please write to:
IRS, Tax Products Coordinating Committee
SE:W:CAR:MP:T:T:SP
1111 Constitution Avenue NW
Washington, DC 20224