Capital gains tax question

[yellow heel]

Hi all,

Suppose you bought a mutual fund for 10k and it has appreciated 1k so it is now worth 11k.

If you sell the fund, when do pay the capital gains tax for that 1k of appreciation?

Do you have to prepay it in advance or can it wait until next April??

TIA!

[jpg7n16]

If you sell the fund, you would take your proceeds minus your tax basis (cost + any reinvested dividends)

So if you bought it for $10k and sold for $11k with no reinvested dividends, yes you would have to claim $1k of capital gains on your taxes when you file for the year in which it was sold.

So if you sold it this year, it would go with your 2011 taxes... filed in next April. You do not have to prepay the taxes on the sale.

[yellow heel]

Thanks for the quick response JPG!

Ok that sounds simple enough. If you sold it this year, you just file the 1k of capital gains for 2011 tax before April 2012.

Do you know when you have to prepay it (I believe its called estimated taxes?)?
Estimated Taxes

Say if the capital gains was 10k or 20k etc, can you still wait until filing the taxes next year??

Thanks again!

[jpg7n16]

I found this from the IRS site as well: Publication 505 (01/2011), Tax Withholding and Estimated Tax


the chart says that if the tax burden from the non-withheld earnings will not cause you to owe more than $1000 in taxes, you don't have to pay the estimates. Since the tax on $1000 of earnings will by definition be less than $1000 (likely $150-250 of tax burden) you'll likely never meet that requirement.


But for 10k or 20k of gains, you might need to go on to step 2. Which pretty much says 'will your employer withhold at least 90% of the estimated total tax burden?' If you typically get a tax refund, that means your employer is withholding over 100% of your regular taxable income - and thus pretty likely that even after including the cap gains, you'd have over 90% withheld.

Using a quick calculator, like the one at Tax Brackets (Federal Income Tax Rates) 2000 through 2010 and 2011, you could estimate about how much will be withheld already. But that's just an estimate.

In the end, a $10k sale may not cause you to go under the 90%, but a 20k sale likely would. It all depends on your income and holding period. (Capital gains on stocks held over a year are only taxed at 15%; on $20k that would only be $3k)


It'd be best for you to consult your tax preparer or CPA if you have a large amount of capital gains for the year. I'm not a tax preparer, or a CPA - so not really an expert on estimated taxes. Sorry. This is the best I could come up with. Hope it helps!

[jerrycates]

For all it's worth... find a good financial analyst... or an accountant who understands these stuff more than anyone else. It will be much safer and sure.

[MonkeyMama]

There are safe harbor rules where if you paid in 100% of the prior year's total income taxes, then there are no penalties no matter how much you owe the following year. Makes life infinitely easier when you have one-time income jumps like a large stock sale. In the grand scheme of things, you probably would not have to pre-pay the tax.

One caveat - over a certain income amount the safe harbor is 110% of prior year's tax.

Since the average person gets a huge refund, I'd expect the average person to withhold 100% - 110% of last year's total tax, and to not have to pay in estimates for a one-time income boost. If you are not average, look up the total tax you paid last year and just make sure you pay that amount in with withholdings and estimates. Pay the rest next April when you file your taxes. (I am a tax CPA).

To be clear - I wouldn't bother for $1k, but this is in response to your question about a $20k gain or something on the larger side.

[yellow heel]

Thanks JPG. That was more than I could come up with. I really appreciate it. I usually get couple hundred back for the Federal but might owe less than 100 for state sometime get back a 100 or so depending on the year.

jerry, I want to understand these stuff even if I even consult a pro. Knowledge is always good to have.

MM, does this only apply to federal? or state too? I owed state (less 100 bucks) last year. 20k was more of a hypothetical question so I won't be worrying about it too much but 1k is more realistic for now (hope that will change in the future ).