Avoiding an Underpayment Penalty
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7. A taxpayer receives a $40,000 capital gains distribution in December from a mutual fund. Assuming no estimated tax payments were made during the year and his only withholdings were from his W-2, what can the taxpayer do to avoid an underpayment penalty? How can this taxpayer avoid this situation in future years?
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Solution Summary
A taxpayer receives a $40,000 capital gains distribution in December from a mutual fund. Assuming no estimated tax payments were made during the year and his only withholdings were from his W-2, what can the taxpayer do to avoid an underpayment penalty? How can this taxpayer avoid this situation in future years?
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IRC section 6654(a) provides that "Except as otherwise provided in this section, in the case of any underpayment of estimated tax by an individual, there shall be added to the tax under chapter 1 and the tax under chapter 2 for the taxable year an amount determined by applying ... (1) the underpayment rate established under section 6621, (2) to the amount of the underpayment, (3) for the period of the underpayment." Section 6654(b)(1) states that "The amount of the underpayment shall be the excess of ... the required installment, over ... the amount (if any) of the installment paid on or before the due date for the installment." Section 6654(c) provides that installments are due on April 15, June 15, September 15, and January 15 of the following year. Section 6654(d)(1)(b) defines the "required annual ...
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