One of the factors in the New Year's market swoon, according to the pundits, was selling by people who had waited until after Dec. 31 to unload appreciated stocks, thus putting off the tax reckoning until April 15, 2001, when this year's return is due.

This may make a great sound bite, but as a tax strategy it has important limitations. In fact, some people who pushed their gains into this year may find they would have been better off to have taken them in 1999.

The first limitation is that you may not get full use of the money for 15 months, as the strategy in its simplest form suggests. The government doesn't want to wait 15 months, so there is a requirement that taxpayers make estimated tax payments if their withholding plus whatever credits they may be entitled to don't cover most of their tax liability.

The second problem is that capital gains, though they are taxed at a lower rate if the asset was held more than a year, add to adjusted gross income, so that they have the potential to make a taxpayer ineligible for various credits that have AGI cutoffs. Similarly, deduction and personal-exemption phaseouts for higher-income taxpayers are affected by a higher AGI.

The third problem is the alternative minimum tax. This complex and arcane tax, created to prevent high rollers with extensive deductions from paying little or no federal income tax, is affecting more and more people. Congress refuses to adjust the thresholds in the AMT, and as a result it is starting to nab middle-class people with unusually large deductions, such as people with lots of children or high state and local taxes.

Many states tax capital gains like other income, so a surge in such gains can create a corresponding surge in state income taxes. Those, in turn, are deductible on the federal return, so they could trigger the AMT.

Taxpayers who did take a large gain last year now need to sit down and see where they stand. It may seem a bit much to start talking about 2000 taxes before you've even filed 1999's, but the more planning you do, the better off you're likely to be.

First, do you have to pay estimated taxes? In general, you're required to pay if your tax liability is $1,000 or more above your withholding and any credits you may be entitled to.

But there are a couple of "safe harbors" that can protect you from the payment requirement. First, if you expect your withholding and credits to be at least 90 percent of your 2000 tax liability, you are not required to pay estimated tax.

Second, if your withholding and credits add up to 100 percent of your 1999 tax liability, you don't have to pay unless your AGI is over $150,000. If your AGI is over $150,000, your withholding and credits must total at least 108.6 percent of your 1999 liability to get you off the hook.

(The figure had been 106 percent, but it was changed in a bill passed in December. You may see the 106 percent figure in some tax publications printed earlier.)

If you don't qualify for one of these safe harbors, you are required to file and you must make payments quarterly--April 15, June 15 and Sept. 15 of this year and Jan. 15 of next year.

Arthur Auerbach, a certified public accountant with offices in Vienna, also notes that the quarterly payments are tied to income received in the quarter. So if you received income early--which you did if you sold a lot of appreciated stock just after New Year's--you're required to pay estimated tax for that money beginning April 15.

"The big thing to point out to people is that estimated tax is actually calculated based on quarters," Auerbach said. This means that even if you end up not owing at the end of the year, you could still be assessed a penalty if you didn't make your quarterly payments.

"You may figure 'I have gains now, but I'll have losses later on to offset them.' That may be true, but it doesn't relieve you of the obligation to pay estimated," Auerbach said.

Conversely, you do not have to make estimated payments until you have income on which you owe tax. Thus, if you don't sell your stock until May, for example, your first payment would be due June 15.

There is a relatively painless way to deal with estimated-tax problems, Auerbach said. "If you [are] somebody who has withholding, increase the withholding to equal the safe harbor. Then you don't have to pay estimated," he said.

It's also a good idea to start taking a look at what your AGI will be for 2000.

First, it determines what threshold you face to reach the estimated-tax safe harbor using last year's tax--100 percent or 108.6 percent.

Second, if you are planning to use various credits, check to see if you will be eligible. Likewise, look to see if the value of your deductions will be eroded by the phaseout for high-AGI taxpayers. If so, it may make sense to shift deductions into 2001 where possible.

Finally, you also can do an AMT calculation to see if you'll be hit. Again, this may give you a chance to defer deductions into 2001 where they may be of more value.

The real lesson here is that there are no longer any simple rules of thumb for tax planning. Whenever you are considering some strategy or maneuver, you have to compute your taxes with and without it, and look at this year's taxes and next year's. This is a lot of work, of course, but apparently Congress wants only those who are industrious or who can afford to hire professionals to be able to play all the angles.

Do You Have to Pay Estimated Tax?

Estimate tax payments are required for income that is not subject to withholding. But there are some "safe harbors" that excuse a taxpayer from having to pay. To determine whether estimated tax payments are required, the Internal Revenue Service has taxpayers answer several questions:

Start here: Do you expect to owe $1,000 or more for 2000 after subtracting income tax withholding and credits from your total tax? (Do not subtract any estimated tax payments.)


You are NOT required to pay estimated tax.


Do you expect your income tax withholding and credits to be at least 90 percent of the tax to be shown on your 2000 tax return?


You are NOT required to pay estimated tax.


Do you expect your income tax withholding and credits to be at least 100 percent* of the tax shown on your 1999 tax return?


You are NOT required to pay estimated tax.


You MUST make estimated tax payment(s) by the required due date(s).

*108.6 percent if your 1999 adjusted gross income was more than $150,000 ($75,000 if your filing status for 2000 is married filing a separate return).

Note: Your 1999 return must have covered a 12-month period.

SOURCE: Internal Revenue Service