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Underpayment of Estimated Tax

The U.S. tax system is a pay-as-you-go system. You're usually required to make tax payments as you earn income. Make estimated quarterly payments if either applies:

  • Your employer doesn’t withhold taxes from your paycheck.
  • Your withholding doesn’t cover all your income.

Estimated tax payments for 2016 are due:

  • April 18, 2016
  • June 15, 2016
  • Sept. 15, 2016
  • Jan. 17, 2017

To learn more, see the Estimated Tax (Form 1040-ES) tax tip.

You might pay an underpayment penalty if both of these apply:

  • You don't make estimated tax payments during the year.
  • The amount you’ve withheld from other income is less than 90% of your tax bill.

To avoid an underpayment penalty, make estimated tax payments if:

  • You have self-employment income.
  • You have other income that taxes weren't withheld from.

The IRS uses this system to figure your penalty payment:

  1. When you file your return, the IRS calculates how much tax you should have paid each quarter.
  2. The IRS applies a percentage (the penalty rate) to figure your penalty amount for each quarter.
  3. The penalty amount for each quarter is totaled to come up with the underpayment penalty you owe.

Have the IRS figure your penalty

If you underpaid your tax, you can have the IRS figure your penalty if:

  • You didn’t start withholding enough tax by year’s end.
  • The exceptions don’t apply to you.
  • You didn’t file Form 2210.

It usually won't cost any more to have the IRS figure the penalty if you pay the amount due by the date specified on the IRS bill. In certain cases, you might be required to file Form 2210.

When the penalty doesn't apply

The IRS won't assess a penalty if certain exceptions apply. If you qualify for an exception, estimated tax payments aren’t the same as withholding.

There are exceptions to the penalty and situations where the penalty wouldn’t apply, including:

  • The total of your withholding and estimated quarterly tax payments was at least as much as your prior-year tax.
  • You had no tax liability last year, and you were a U.S. citizen or resident alien for the whole year.
  • You owed some tax last year, and you had that amount or more of tax withheld from your paychecks this year. However, if your adjusted gross income (AGI) was more than $150,000 -- or $75,000 if married filing separately -- you must pay at least 110% of last year's tax.
  • You had at least 90% of this year's tax withheld from your paychecks.
  • The amount you owe this year is greater than your withholding by no more than $1,000.
  • You didn’t have any withholding taxes, and your 2015 tax is less than $1,000.

Ways to lower or eliminate the penalty

If the exceptions don’t apply to you, you still might reduce the penalty you owe -- or avoid the penalty altogether. To do this, you must file Form 2210.

File Form 2210 if any of these apply:

  • Your estimated quarterly payments were adequate and timely for your tax situation. Ex: You owed $20,000 in tax and you paid $5,000 every quarter.
  • You generated a large part of your income later in the year. Ex: You sold an investment in December and generated a gain.
  • A large part of your tax payments occurred earlier in the year. Ex: You applied a large overpayment from last year's return to this year's taxes.
  • Your filing status changed to or from married filing jointly. If you married this year and both filed as single last year, you can usually combine last year's tax on your return and last year's tax on your spouse's return. See Publication 505: Tax Withholding and Estimated Tax or Form 2210 instructions if both of these apply:
    • You filed a joint return last year.
    • Your 2015 filing status isn’t married filing jointly.
  • You’re a farmer or fisherman, and your withholding plus quarterly estimated tax payments are at least 66.67% of your 2015 tax.
  • A casualty or disaster occurred, making it unfair for the IRS to impose the penalty. Attach a statement to your return to explain the casualty or disaster.
  • You're retired or disabled, and your underpayment was due to a reasonable cause rather than willful neglect. Attach a statement to your return explaining what caused the underpayment.

Avoiding a penalty by changing your withholding

If you discover before the end of the year that you’ll owe more taxes than you’re withholding, you can file a new W-4 form with your employer.

If at the end of 2015 you’ve withheld the full amount of taxes, you won’t be penalized.

You won't get the same result by making an estimated payment. If you make an estimated payment late in the year, the date matters when calculating the penalty.

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