If I anticipate a sizable capital gain on the sale of an investment during the year, do I need to make a quarterly estimated tax payment during the tax year?

You would be liable for estimated tax if the following applies:

General Rule

You must pay estimated tax for 2007 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2007, after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of:

......... a. 90 % of the tax to be shown on your 2007 tax return, or

......... b. 100% of the tax shown on your 2006 tax return. * Your 2006 tax return must cover all 12 months.

*Certain taxpayers with higher adjusted gross income must substitute 110% for 100%. Refer to Chapter 2 of Publication 505, Tax Withholding and Estimated Tax, for the income amounts that the higher percentage applies to.

You may be able to annualize your income. Please see Publication 505, Tax Withholding and Estimated Tax, Chapter 2, for more information. If you are making estimated tax payments you can increase your quarterly estimated tax payments or increase your Federal income tax withholding to cover the tax liability. If you have the proper amount withheld you may not be required to make estimated tax payments nor have to file Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and Trusts, with your tax return (as you would if you just increased the remaining estimated tax payments). If you wait and make increased estimated tax payments in the later quarters, you would have to file Form 2210 with your tax return because we do not know when you received the income. Since you really did not receive the income evenly throughout the year, you have to tell us when the income was received by filing Form 2210.

References:

• Form 1040-ES (PDF), Estimated Tax for Individuals
• Tax Topic 306, Penalty for Underpayment of Estimated Tax