Do I pay capital gains taxes on the sale of funds in the same quarter that I sold them?

May 24, 2019

askacpaiconI've been investing in a couple of Vanguard funds. These are not linked to any 401(k) account. I will have to start selling them. As I've been investing for a few years, I'll probably have a capital gain and will have to pay federal and Pennsylvania taxes. Can I just wait for April 15, or do I have to pay taxes in the same quarter that I sold the fund? 

Estimated tax payments will be required if you expect to owe at least $1,000 in tax after subtracting your withholdings and refundable credits, and you expect your withholdings and refundable credits for 2019 to be less than either 90 percent of your 2019 tax liability or 100 percent of the tax shown on your 2018 income tax return. The same rule applies for both federal and Pennsylvania taxes.

Therefore, if you have withholding and it covers at least 90 percent of your expected 2019 tax or 100 percent of last year’s tax (whichever is smaller), you may not need to pay in estimated taxes on your expected capital gain from your Vanguard funds, and you can pay your remaining tax bill in April 2020.  However, if you don’t meet the 90 percent or 100 percent "safe-harbor" thresholds, then you should adjust your withholdings or make estimated payments to cover that additional tax liability.

Estimated tax payments should match the period when the income was realized. If income that is not subject to withholding is earned or received evenly throughout the year, then estimated payments should be made in four equal installments to avoid a penalty. However, if income is received unevenly (for example, you sold most of your Vanguard funds in the second quarter of 2019) you may be able to lower or eliminate the amount of your required estimated tax payments for one or more quarters by using the annualized income method.

A CPA can help you further analyze your estimated tax payment situation and assist you with your income tax planning this year.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: James G. McGrory, CPA, and Stephanie K. Otake, CPA, are with Drucker & Scaccetti in Philadelphia.

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