The requirement to pay estimated taxes on capital gains (along with its associated penalties for non-compliance) is counterproductive. It hurts both the taxpayer and the government and should be abolished.

Here's an illustration of what I mean. Let's say a man in the 35% tax bracket incurred a $1000 tax bill in the first quarter on an investment that earns him 20% a year. He could go ahead and send that money in to the IRS by the first quarter deadline to avoid a 5% penalty for the final three quarters of the year. This penalty would be $37.50 ($1000 x .05 x .75). Or he could go ahead and keep that money drawing the 20% for the last three quarters ($1000 x .20 x .75) for a total of $150. Of course, he would have to pay the $37.50 penalty when he files and the taxes on his additional $150 gains would be $52.50. That would still leave him with $60 ($150 - $37.50 - 52.50) that he wouldn't have had by just paying the estimated taxes. Even if there is a subsequent penalty on the $150 totaling $5.63 ($150 x .05 x .75), he would still be left with $54.37.

In the example above, many people would go ahead and send in the $1000 by the first quarter deadline in order to avoid the penalty. The rules encourage them to do this, but by doing so, they are cheating themselves and the government out of money. If the estimated tax requirement for capital gains were abolished, the man in my illustration would end up keeping an additional $97.50 ($150 - $52.50) and the government would get an additional $52 in tax revenue by letting him hold on to his money longer. In addition, the rules associated with estimated taxes are way too complicated and cause major inconveniences for taxpayers and IRS employees alike.

With all of that in mind, I so no reason why this requirement as it applies to capital gains should not be eliminated as soon as possible. Is the government so rich that can routinely turn away the extra funds? Does it just like to limit the earning ability of its citizens? Or does Congress just make a habit out of shooting itself in the foot? I think we all know the answer to that last question. Therefore, don't expect any changes to estimated tax rules any time soon.

Terry Mitchell

Terry Mitchell is a software engineer, freelance writer, blogger, and amateur political analyst from Hopewell, VA. He's been in the software development/engineering line of work for over 24 years.

He blogs and writes about various subjects such as current events, politics, cultural and social issues, health and well-being, personal finance, religion, technology, media issues, law, government, sports, humor, and trivia.

Through the BlogBurst network, his blog entries are often carried on the Website of the Houston Chronicle, one of the top newspapers in America. In addition, his columns and essays regularly appear on American Chronicle's network of 21 online magazines. They have also appeared online on American Daily, Media Monitors International, Opinion Editorials, The Washington Dispatch, Arrivenet, and hundreds of additional websites.

Terry never misses an opportunity to assail political correctness and take pot shots at the conventional foolishness. He's not a bandwagon jumper - he writes stuff that others should be writing, but are not. He thinks of himself as a kind of modern American philosopher. His blog offers commentary from a unique point of view that is not often found in mainstream media.

Terry would love to have his blog picked up and syndicated by a major news or web organization. He also plans to write a book based on his blog. But, for now, he mainly writes for free as a hobby and enjoys having his aritcles posted on as many websites, ezines, news letters, newspapers, and magazines as possible.