US Tax Question re Cap Gains and Witholding Penalty

[racemize]

This year I got hit with a withholding penalty, because of the following:

 

I have a salary + variable bonus structure.  In 2011, I worked a lot and got a nice bonus, but last year I did not work as much and so the bonus was lower.  Accordingly, my witholding for 2012 was significantly less than in 2011 (33% less in fact).  At the same time, I had a lot of long term gains that I realized, which made me owe ~15% more than I witheld for this year, resulting in a withholding penalty.

 

I'm trying to figure out how to resolve this issue in the future as there is no way to withhold for taxes on cap gains through Fidelity.  Should I just always withhold as much as I have in the last year or two?  Does it matter when I get the taxes in as long as it is before the year end (e.g., if I do an estimation including cap gains and pull it out of my bonus so that the number is right, does that matter if I had the large cap gains at the beginning of the year versus the end)?

 

It may be time to break down and get a CPA...  Also, of course I understand that anything you guys say is not actual advice, etc. etc., just trying to see what folks who have already had this problem do.

[Kraven]

This year I got hit with a withholding penalty, because of the following:

 

I have a salary + variable bonus structure.  In 2011, I worked a lot and got a nice bonus, but last year I did not work as much and so the bonus was lower.  Accordingly, my witholding for 2012 was significantly less than in 2011 (33% less in fact).  At the same time, I had a lot of long term gains that I realized, which made me owe ~15% more than I witheld for this year, resulting in a withholding penalty.

 

I'm trying to figure out how to resolve this issue in the future as there is no way to withhold for taxes on cap gains through Fidelity.  Should I just always withhold as much as I have in the last year or two?  Does it matter when I get the taxes in as long as it is before the year end (e.g., if I do an estimation including cap gains and pull it out of my bonus so that the number is right, does that matter if I had the large cap gains at the beginning of the year versus the end)?

 

It may be time to break down and get a CPA...  Also, of course I understand that anything you guys say is not actual advice, etc. etc., just trying to see what folks who have already had this problem do.

 

This is pretty basic stuff for a CPA. It's definitely worth getting one.  I don't recall the exact rules, but it's pretty straightforward for them.  I think there are 2 general withholding safe harbors.  The first is essentially your tax for the year.  That is, you need to be right about what it will be.  The second safe harbor is something like 110% of the prior year's tax.  So both create issues.  In the first case, you need to withhold based on what your income will be, but you might not be sure what it is.  The second case is a problem if your income is lower than the prior year.  In terms of timing, yes, it matters.  It's not just a get it in by the end of the year problem.  So income from the beginning of the year starts the clock around then and not on Jan 1 of the next year.  There is a way the accountants allocate income across all 4 reporting periods to determine how much withholding penalty might be owed.  Of course I have no idea if this is right or not.  Talk to a CPA.

[Bagehot]

This year I got hit with a withholding penalty, because of the following:

 

I have a salary + variable bonus structure.  In 2011, I worked a lot and got a nice bonus, but last year I did not work as much and so the bonus was lower.  Accordingly, my witholding for 2012 was significantly less than in 2011 (33% less in fact).  At the same time, I had a lot of long term gains that I realized, which made me owe ~15% more than I witheld for this year, resulting in a withholding penalty.

 

I'm trying to figure out how to resolve this issue in the future as there is no way to withhold for taxes on cap gains through Fidelity.  Should I just always withhold as much as I have in the last year or two?  Does it matter when I get the taxes in as long as it is before the year end (e.g., if I do an estimation including cap gains and pull it out of my bonus so that the number is right, does that matter if I had the large cap gains at the beginning of the year versus the end)?

 

It may be time to break down and get a CPA...  Also, of course I understand that anything you guys say is not actual advice, etc. etc., just trying to see what folks who have already had this problem do.

 

As long as you withhold 110% of your prior year tax paid, you won't get hit with a penalty regardless of how much your tax liability increases. I think if your AGI is under $150k, you only have to withhold 100%, but anyway 110% is safe regardless of your income level.

[eggbriar]

I used to take an additional amount withheld from my paycheck at the end of the year to cover what I wanted to withhold.  The amount withheld on your paycheck is considered to be paid ratably over the entire year, even if it was made on your last check.  Otherwise, you can withhold additional taxes on a quarterly form 1040-ES and those will be treated at the time you file them.

[CONeal]

In the past I have been making estimated payments each qtr based on the gains in stocks during that qtr.

 

To be on the safe side going forward I plan to use a CPA.  With all the new rules and Obamacare tax, its getting to much to keep up with.