Tax Dictionary – Estimated Tax Penalty
If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
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If you didn’t pay enough taxes during the year by withholding taxes from your paycheck or by making estimated tax payments, the IRS may charge you an estimated tax penalty. The IRS charges estimated tax penalties because, by law, you’re required to pay taxes as you receive income throughout the year.
You can avoid this penalty if:
- You owe less than $1,000 in tax, or
- You paid at least 90% of the tax you owe for the current year, or you paid 100% of the tax you owed for the prior year (whichever is less).
You may be able to reduce estimated tax penalties when you file your tax return with IRS Form 2210. This form allows you to provide an exception or reduce the amount of the penalty by applying one of the many IRS rules. Going forward, it may be a good idea to adjust your withholding or make estimated tax payments.
In rare circumstances of financial hardship, the IRS can abate estimated tax penalties.
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