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. If you don’t, you have a penalty for late estimated tax payments. You should make estimated quarterly payments if either of these applies:

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

Estimated tax payments are due:

  • April 15
  • June 15
  • Sept. 15
  • Jan. 15 of the following year

If any of these days falls on a weekend or holiday, your payment is due on the next business day instead.

Late Estimated Tax Payment Penalties

When dealing with missed estimated tax payments, include any payment made after its due date in the total amount paid during the next quarter.

Ex: If your second quarter payment was due June 15, 2018, and you paid it two weeks after that due date, the IRS will consider this payment made in the third quarter.

You’ll get a notice from the IRS informing you of any estimated tax penalties and fees.

Underpayment of Estimated Tax

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 for late estimated tax payments:

  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.

Letting the IRS Calculate Your Penalty

If you already underpaid your tax, one of your options is to let the IRS calculate your penalty. You can let the IRS figure your penalty if:

  • You didn’t withhold enough tax by the end of the year.
  • The exceptions don’t apply to you.
  • You didn’t file Form 2210.

It usually won’t cost 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 have 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 2018 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 2018 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 2018 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 the year 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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