HOW TO FIGURE HOW MUCH QUARTERLY TAX YOU OWE ON A STOCK SALE
Today (4/17/2012) is tax day and that means your tax returns for 2011 are due AS WELL AS your estimated tax payment for the first quarter of 2012. If the state you live in has a tax then you owe that payment too.
Many people wrongly assume that quarterly estimated tax payments only need to be made by people who are self employed, have their own businesses, or have freelance income. But many more people need to make those payments and the best place to read about it is this IRS page. Even a more detailed source is publication 505.
Basically, you owe tax on all money you make so if you make enough in any areas of your life other than your job (where taxes are already being withheld) , you need to make that estimated payment. As it says on the IRS site, the United States tax system is a pay as you go system so that means they want their money as you earn it and NOT at the end of the year.
Your capital gains on stocks may mean you need to make an estimated tax payment
When you buy stocks and get into investing your savings, the goal is to make money. And if you do start to make money, whether it be on a consistent basis or just on periodic stock sales, you will owe those estimated payments (as long as you owe more than $1000 in taxes).
The more money you accumulate in the course of your life, the greater the likelihood that you will have to start making those estimated tax payments every quarter for the income you generate from your savings and investments. This is just about the only negative there is to having money that I can see!
How much tax do you owe on your stock sale?
That will depend on what your stock gain is, whether the gain is long or short term, and what your income is. For 2012 all stock long term gains will be taxed at 15% (or less) and short term gains may be taxed as high as your income tax bracket. See chart below:
Long term stock gains are easiest to figure out because you will either owe nothing or 15% of your gain depending on whether you are in that 25% (or higher) tax bracket or not.
You will be paying more for short terms stock gains as the chart shows and you will need to add up all the income you think you will make in 2012 and then determine what tax bracket you will be in. That will determine whether you owe 10%, 15%, 25%, 28%, 33% or 35% on your stock gain.
The key is to know what your tax bracket is and whether the gain is short or long term.
Once you do those calculations, you will then know how much you owe the IRS for your quarterly estimated tax payment. About the only good thing is that the IRS gives you a buffer of 10% and you won’t get a penalty if you pay 90% of what you owe. That way, if you miscalculate a bit, you don’t have to worry about getting penalized.
Do you owe all the tax right away or can you pay some each quarter?
You must pay all the tax you owe right away in the quarter you earn it. For instance, if you have a $20,000 short term stock gain in the first quarter of 2012 (many people might have that if they sold Apple stock!) and your marginal income tax rate is 25%, you will owe 25% of $20,000 which is $5,000 in taxes.
You have to pay that $5,000 to the IRS with your first quarter estimated payment and you CANNOT pay it in equal installments of $1250 in each of the four quarters of the year. Unfortunately, the IRS always wants their money right away.
A lot of first time buyers of stock who got into the market because they wanted Apple stock may be wrestling with whether to take short or long gains as well as how to make their quarterly tax payments that are due for the first time.
