Estimated taxes on capital gains, RSUs and other lumpy income

Employers withhold from wages. Brokerages, on the whole, do not withhold from a stock sale. So when you realise a $200,000 gain in November, no tax has been collected on it, and the IRS still expects to have been paid during the year rather than in April.

The default assumption compounds the problem: the equal-installment method treats your annual income as if a quarter of it arrived in each period, so a November gain generates a required payment dated back to April 15 — a deadline that passed months before the income existed. That is the mechanism behind most surprise underpayment penalties.

Long-term gains — assets held more than a year — are taxed at preferential rates, but which rate applies depends on your total taxable income, not the gain alone:

• Short-term gains — assets held a year or less — get no preferential treatment at all. They are taxed as ordinary income, up to 37%.
• The 3.8% Net Investment Income Tax applies on top once modified AGI exceeds $200,000 single, $250,000 married filing jointly or $125,000 married filing separately. A large gain is the classic way to cross that line.
• State tax is separate, and most states tax capital gains as ordinary income with no preferential rate.

When RSUs vest, the full market value is ordinary wage income and your employer withholds on it. The trap is the rate. Supplemental wages are commonly withheld at a flat 22%, which is fine if that is near your marginal rate and badly short if you are in the 32%, 35% or 37% bracket.

On a $300,000 vest for someone in the 35% bracket, 22% withholding leaves roughly $39,000 uncovered — and it is due during the year, not in April. Any gain between the vest price and your eventual sale price is a separate capital gain on top, short-term if you sell within a year of vesting.

1. Check the prior-year safe harbor first.If you pay 100% of last year's total tax — 110% where prior-year AGI exceeded $150,000 — you are protected from the penalty no matter how large this year's gain is. In a windfall year this is usually much less than 90% of the current year's tax, and it is the cheapest way to be safe. See the safe harbor guide.
2. Otherwise pay in the quarter of the sale.Estimate the tax on the gain, including NIIT, and pay it by that quarter's deadline.
3. Consider withholding instead, late in the year. Withholding counts as paid evenly across the year, so increasing it on a year-end paycheck or retirement distribution can cover earlier quarters that an estimated payment cannot reach.
4. Annualize at filing time. File Form 2210 with Schedule AI so the earlier installments are computed from the income you had actually earned by each date.

Lumpy income is exactly the case Schedule AI was written for. A gain realised in December belongs to the fourth annualization period; the first three periods are computed from income that genuinely existed at the time, which for many filers means little or no required installment in those quarters.

The calculator handles long-term and short-term gains, qualified dividends, NIIT and the Additional Medicare Tax, and runs the annualized method quarter by quarter — see the Schedule AI guide for how the method works.