Penalties on Income without Tax Withholding

scottf

If I sell an investment with significant capital gains, do I need to worry about being penalized (in addition to the tax owed) for not withholding enough? If so, is there a way to avoid these penalties such as pre-paying tax on the income shortly after the sale? For example (neglecting deductions), suppose I made $100k through my employer and had $24k withheld equaling the tax owed from my regular income, but during the year I also sold an investment with an additional $100k of capital gains, totaling $200k of income but only $24k of tax withheld.

AlexO

Hello, scottf!

That is a great question!

You may be penalized if you owe over $1,000 when you file your return. This is commonly referred to as the "underpayment penalty". To avoid this penalty, you can either pay 90% of the tax shown on the return for the year or 100% of the tax shown on the return for the prior year, whichever is less. For more information, see the link below:

https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty

Thus, if you're unsure if you will owe over $1,000 when you file your return, you can ensure that your withholding plus any additional tax payments are 100% of your prior year's tax. These additional tax payments are estimated tax payments. You can make estimated tax payments directly on the IRS website.