Big Stock Gain, No Quarterly Payments: What to Do in October?

Someone on Reddit has $184,000 realized gain year-to-date in a brokerage account and $66,000 gross salary, with no quarterly estimated tax payments so far. They didn't realize they needed to pay quarterly and are asking what they can do in October to limit underpayment penalties (they'd heard of a roughly 7% penalty) and whether to include the 7% penalty for roughly 10.5 months in their planning. If you expect to owe more than $1,000 in tax after withholding, you generally must pay estimated tax during the year. With $66k salary plus $184k realized gain, you can expect to owe much more than $1,000. Make a large estimated payment now to reduce the underpayment; use safe harbor (e.g., pay at least 100% of prior-year tax via withholding plus estimated payments by year-end) to avoid or reduce the penalty. The penalty is not simply 7% × 10.5 months on your whole bill; it's calculated on the underpayment for each period.

Bottom line: With $66,000 salary plus $184,000 realized capital gain, you generally must pay estimated tax during the year (quarterly). The IRS can impose an underpayment of estimated tax penalty (often in the ballpark of current interest rates, e.g., around 7% annually). The penalty is not "7% × 10.5 months" on your whole tax bill; it's calculated on the underpayment for each period you didn't pay enough. What you can do in October: (1) Make a large estimated payment now toward your expected full-year tax; paying now reduces the underpayment for remaining quarters and can lower the penalty. (2) Use safe harbor: If your withholding + estimated payments for the year are at least 100% of prior-year tax (110% if prior-year AGI was over $150,000), you generally avoid the underpayment penalty even if this year's tax is much higher. (3) File on time. Pay at IRS.gov/payments; designate estimated tax for the correct year. For how much to pay now and whether to use Form 2210, consult a tax professional. Margen can help you model income, gain, and estimated tax.

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Question from Reddit

Prepayments - 184k stock gain

Hello,

Feeling a bit dumb here.

I have made a realized gain in my brokerage account of 184k YTD. I planned on setting aside roughly 30% for tax season. I make 66k gross.

Didn't realize that I needed to be paying quarterly payments to the IRS (still researching as to how to even calculate the amount and where to pay it, assuming IRS website)

I see there is a roughly 7% penalty?

My question is: with it being October, is there anything I can do to salvage this? I plan on liquidating some positions to pay on the bill, but I'm just full of so many questions. Like do I include the 7% penalty for roughly 10.5 months?

Thanks.

Source: Reddit

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Analysis

The user is asking about the tax impact of a large realized gain ($184,000) in a brokerage account and quarterly estimated tax obligations, including penalties for not paying during the year and what they can do in October to limit the damage. They also want to know whether to include the penalty (e.g., ~7% for ~10.5 months) in their planning.

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Answer

Quarterly estimated payments

If you expect to owe more than $1,000 in tax after withholding and refundable credits, you generally must pay estimated tax during the year (quarterly). With $66,000 salary plus $184,000 realized capital gain, your total income is much higher, so you can expect to owe a lot more than $1,000, and the IRS expects payments as the year goes.

Penalties

The IRS can impose an underpayment of estimated tax penalty. It's often in the ballpark of current interest rates (e.g., around 7% annually). The penalty is not simply "7% × 10.5 months" on your whole tax bill; it's calculated on the underpayment for each period you didn't pay enough. So the penalty is limited to the shortfall per quarter, not the full bill for the full year. You don't "include the 7% for 10.5 months" as a separate line item you send the IRS; the IRS calculates the penalty and you pay it (or they assess it) when you file. Your job now is to reduce the underpayment and, if possible, use safe harbor so less (or none) is penalized.

What you can do in October

1. Make a large estimated payment now. Pay as much as you reasonably can toward your expected full-year tax (e.g., using your salary + $184k gain to estimate total tax). Paying now reduces the underpayment for the remaining quarters and can lower the penalty. You can pay online at IRS.gov/payments (e.g., direct pay, EFTPS) or by mailing a check with Form 1040-ES (or the voucher). Designate the payment as estimated tax for the correct year and, if possible, the appropriate quarter(s).
2. Use the safe harbor rules. You may avoid or reduce the penalty if:
   • Your withholding + estimated payments for the year are at least 90% of your current-year tax, or
   • They are at least 100% of your prior-year tax (110% if prior-year AGI was over $150,000). So if your prior-year tax was, say, $X, paying at least $X in total (via withholding + estimated payments) by year-end can eliminate the penalty, even if your actual tax is much higher. Making a big payment in October can help you reach that safe harbor.
3. File on time. File your return on time (including extensions if you need them). Late-filing penalties are separate and often harsher than the underpayment penalty. Filing on time (even if you can't pay the full balance) limits extra penalties and gives you a clear number for what you owe plus underpayment penalty.

Liquidating to pay

Using proceeds from selling positions to fund the estimated payment is fine; just remember that additional sales can create more gain and more tax, so factor that into how much you sell and how much you pay in.

Calculating how much to pay

Use Form 1040-ES and its worksheet to estimate your total tax for the year (salary + capital gains, minus deductions, etc.), then subtract withholding already paid. The difference is what you're expected to pay via estimated tax; paying a big chunk now helps. Margen can help you model your income, gain, and estimated tax so you know how much to pay now and what to expect at filing time.

Related: Living Off $45k in Sold Stocks: Can You Pay 0% Long-Term Capital Gains Tax? · How Do I Enter Capital Loss Carryover in H&R Block? · Selling Company Stock and Yearly Income Bracket · Capital Loss Carryover in H&R Block: Short-Term vs Long-Term

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Applicable Sections

Federal / IRS

• IRC § 6654: Underpayment of estimated tax by individuals; penalty is generally calculated on the underpayment for each period.
• Form 1040-ES: Used to calculate and pay estimated tax; the IRS provides the form, instructions, and vouchers (IRS Estimated Tax).
• Safe harbor: Penalty may be avoided if withholding + estimated payments meet 90% of current-year tax or 100%/110% of prior-year tax (see Form 2210 and instructions).

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Practical Notes

• Pay now. A large estimated payment in October (or as soon as you can) reduces underpayment for later periods and can cut the penalty.
• Safe harbor. If you can get total withholding + estimated payments to at least 100% of last year's tax (110% if prior-year AGI was over $150,000), you generally avoid the underpayment penalty even if this year's tax is much higher.
• Capital gains are part of taxable income and can push you into higher brackets; your total tax is on salary + gains (and other income), so plan for that.
• Where to pay: IRS.gov/payments: direct pay, EFTPS, or check with 1040-ES. Designate the tax year and "estimated tax."
• Margen can help you estimate total tax, withholding, and how much to pay now so you're not guessing, and so you can plan for the full bill and any penalty at filing.

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Limitations

This answer does not cover state estimated tax or exact penalty math (which the IRS does on Form 2210). For advice tailored to your numbers, including how much to pay now and whether to use Form 2210, consult a tax professional. Margen can help you model your situation and prepare your taxes.