How can I leesen the chance of a big tax hit from capital gains on sale of stock?

Question

I've just realized that I have about $40,000 in short term gains from sale of stock for the year. I also have another $15,000 likely. We have been selling stock to pay for a new house. My wife and I have taxable income around $50 - 60K. Two Dependant children and a mortgage deduction. Last year I was penalized for under withholding so I upped my contribution by lower the number of deductions. The problem I see coming is that I have far more gains than I realized.

What is the best way to handle this with only two months to go in this year?

Answer 1

If your capital gains fall within this last quarter you still have time to send in an estimated payment to cover the additional tax. Then when you file your return you can annualize your income to show that the capital gains were not realized until the last quarter so that you will not be penalized for underpayment.

Answer 2

There IS a way to lower the big tax hit, and that's to exercise your right to tell Uncle Sam WHICH stock you are selling. So if you want you can opt to pay capital gains on the most recent stock your purchased, which cost more than the first stock, which probably cost a lot less. That way, the difference in value is less and therefore the capital gain will be less. Of course, this just defers the inevitable, which is paying for capital gains on the stock you paid the least for... but if it will help you this year, why the heck not. Be sure to pay only the lower rate for capital gains - the IRS forms explain it really clearly. Fortunately www.irs.gov is pretty user-friendly.

The best explanation I have seen regarding taxes and investments is "But Which Mutual Funds?" by Goldman - it's a GREAT book! I bet your library carries it.

Answer 3

File your return by 1/15/08 to avoid any penalties for underpayment of tax this year. Or at least make an estimated payment using Form 1040-ES by 1/15/08.

There's not a lot you can do to minimize the tax bite from the short term gains unfortunately. If you havn't maxed out your 401(k) you might be able to increase the contributions if your plan allows. Or use some of your wages to fund a traditional IRA. Do keep in mind the cash flow impact of doing that, however.

One thing you could do is dump any turkeys in your portfolio if you have any losers that you've been hanging on to. That will offset your short term gains and lessen the pain on the taxes.

Answer 4

You cannot lessen the chance, you will be taxed on the gain as ordinary income. However, most or all of this gain will be taxed at 15% because of your other income, filing status, and exemptions.

Send in an estimated payment immediately and another one in January.

With $55,000 in gains you may have additional tax of $9,000. So $4,500 for each payment will likely solve your problem.

Here is the form:

http://www.irs.gov/pub/irs-pdf/f1040es.pdf

Answer 5

Figure out about what you'll owe for the year in taxes, and if you are going to come up short with your withholding, make an estimated payment by January 15 with form 1040ES and at least you'll avoid penalties for underwithholding.

Answer 6

The loss could cancel out the earnings. No tax due. Capital beneficial properties is calculated based on the internet total of your sales. You pay capital beneficial properties once you report your earnings tax, and the quantities are pulled out of your annual assertion.

Answer 7

You should have made estimated payments but I'm assuming you haven't done that. There is still one more estimated payment to go on this year. Go to www.irs.gov and search estimated payment. Print the form and mail in a payment. The next due date is Dec. 17, so send in some money before then.