Am I responsible to pay my home State and Federal income tax again if the company at another State paid it?

Question

I live in San Francisco, California and sold an old print in Manhattan, New York through Swann Auction (a local auction house in Manhattan); if I ask Swann Auction to pay the tax in advance for me - should I pay the IRS again?

Answer 1

Swann Auction may be able to make a withholding of estimated tax but they could not "pay the tax" for you should you have a gain on the sale.  Every year I get a couple dozen people that think they "paid the tax" for something when they simply had a given amount of withheld toward the eventual tax.  A good example are those that sell stocks from their 401K account.  The stock broker holds out 20% as federal withholding.  The client does not report the sale because "he paid the tax".  About June or July of the following year he gets a Notice of Under-reporting of Income (CP2000) and comes in yelling that he already "paid that tax".  When we figure his tax for that sale it sometimes is 50% or greater with both state and federal income tax and earlier withdrawal penality.  Now he owes the original tax and an additional penality and interest for not reporting the income (that he thought he had paid the tax on).

Answer 2

You have a capital gains tax to pay - sometime.  

You have three choices on how and when to pay that.

1.  You can have the auction house take some out and forward it to the IRS on your behalf (if they do that sort of thing)

2.  You can send in an estimated tax payment now with Form 1040-ES.

3.  You can just wait until you file your 2008 taxes and pay it then.  If this sale is enough to cause a large balance due for your year, it will also cause you to have an underpayment penalty, so this may not be a good way if the sale was substantial compared to your other income.

If you do either #1 or #2, you will receive credit for those payment when you file your 2008 taxes, so you will not have a balance due from the sale.

It is really personal preference, but paying more than once isn't necessary, and it will all reconcile out when you do your 2008 taxes.