Calculating estimated quarterly tax liability on short term stock sales?

Question

Please advise on how to estimate the estimated tax liability on short term stock sales in any given quarterly period.

For example, I computed my short term gains this period to be $1000. My Pennsylvania income tax rate is 3.07% and I fall into the 25% Federal Income Tax bracket. So, am I correct to estimate my paymet by first computing the PA state tax liability $1000 * 0.0307 = $30.7, and then to calculate the Federal liability by first subtracting state tax payment from the short term capital gain $1000 - $30.7 = $969.3 and then computing the federal liablity on this net amout $969.3 * 0.25 = $242.325?

No guesses please.

Answer 1

You're right except for subtracting the PA tax payment from the gain before computing the federal tax - that's not allowed.

Since you're just calculating the quarterly estimated payments, small differences won't really matter, you're not expected to estimate to the penny. Since you're talking less than $8 difference, won't really matter on the quarterly estimate.

If you itemize, you will be able to deduct your state tax payments as an itemized deduction, so it would reduce your actual federal tax liability, so your logic would actually be correct. You wouldn't be able to show it on your actual return though as a reduction to your capital gain. And if you take the standard deduction, you wouldn't get credit for it at all.

Answer 2

Why would you be paying estimated quarterly taxes if you're in the 25% bracket? I am not an accountant, but that seems strange. Go back to annual, if you can. So much simpler. In fact, I'm supposed to pay quarterly, but it makes more sense for me (in terms of cash flow) to pay annually and take the penalty each year. As to your question, an accountant will have to chime in...

Answer 3

If those are the MARGINAL tax rates - then your basic calculations are correct - assuming you itemize your deductions.
However, it also assumes that your regular withholding from your 'day job' is correct. That is, if you are having too much withheld from your paycheck, you may not need to make any estimated tax payments. Conversely, if you are having too little withheld from your paycheck, your estimated tax payments may need to be even higher.