How to figure your capital gains tax bite so the IRS doesn't zap you (2024)

Dear Liz: We had big capital gains this year, and we owe taxes plus a penalty for not paying estimated taxes. Is there a way to plan ahead for taxes since every year is different regarding gains or losses? I know one option is to just pay estimated taxes quarterly based on the previous year’s gains. Apparently the mutual fund companies don’t automatically withhold the taxes.

Answer: Our tax system is “pay as you go,” which means the IRS expects you to pay taxes as you earn or receive income. If you fail to do so and your tax bill is more than $1,000, you may face penalties.

As you rightly note, though, you won’t know what your total capital gains or losses will be until year’s end. You wouldn’t want to pay taxes on a big gain one quarter only to have a big loss the following quarter. You can avoid the penalties by making sure your withholding and estimated tax payments equal at least 100% of the total tax you paid in the previous tax year if your income is $150,000 or less. If your income is over $150,000, your payments and withholding should equal at least 110% of last year’s taxes.

The alternative is to pay at least 90% of the tax you’ll owe on your estimated income for the current year. A tax pro can help you figure out how much you need to pay as well as offer tips for reducing your tax bill.

When institutions won’t go paperless

Dear Liz: I have for years insisted on being paperless, not only for credit card statements and utility bills but also for tax documents such as the 1099-INT and 1099-DIV. My problem is that I receive income from two lifetime annuities and those of course generate 1099-R forms each year, which are mailed to me. I have requested to receive those as PDFs from the companies that execute those annuities, and they claim they cannot do so and are not required to. Are they right, or is there some federal regulation I can quote to force the issue?

Answer: The idea that a business can’t generate an electronic form for a customer is a little ridiculous, but there’s not much you can do to force these companies to get with the times.

The IRS requires that any person or entity that files more than 250 information returns — 1099s, W-2s and other forms that report potentially taxable income — do so electronically. But that requirement applies only to forms being sent to the IRS, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. There’s no requirement that such forms be issued electronically to individuals.

Which is unfortunate, since as you know getting forms electronically is much safer than having your private financial information sent through the mail. Since these companies are so insistent on clinging to paper, consider sending a letter — certified mail, return receipt requested — to the companies’ chief executives requesting that they join the 21st century.

Sorting out trust confusion

Dear Liz: In a recent column you wrote of bypass trusts that “for many people this estate planning tool has outlived its usefulness.” In California, a trust avoids probate. Isn’t avoiding probate a reason to continue with a trust?

Answer: What you’re referring to is a living trust — a revocable (which means changeable) trust created while someone is alive. A bypass trust is irrevocable (which means not changeable) and typically goes into effect when someone dies. To further complicate matters, a living trust or a will can have provisions that create a bypass trust after someone dies.

Living trusts are indeed designed to avoid probate, the court process that otherwise follows death to settle an estate. Living trusts remain useful to many people who live in states where probate can be expensive and prolonged, such as California and Florida. Living trusts are also private, unlike wills, which typically become public record after death, and so are favored by people who want to avoid publicity.

Bypass trusts, on the other hand, were primarily designed to minimize or avoid estate taxes, which are no longer a concern for the vast majority of people. Bypass trusts have a number of disadvantages, so if you have one in your estate plan, you’ll want to consult an experienced estate planning attorney about whether to keep it.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.