Question

Why would I owe a tax underpayment penalty?

Answer

To avoid underpaid taxes and a subsequent tax underpayment penalty, you should have paid taxes as you received income during the year through one of these methods:

  • Withholding taxes from your paycheck
  • Filing quarterly estimated payments

If you didn’t pay enough taxes during the year, you’ll have a balance due. You’ll also owe an underpayment penalty if both of these apply:

  • Your balance due is more than $1,000.
  • The tax you paid was less than the smaller of:
    • 90% of your current tax liability
    • 100% of your prior-year tax liability
    • 110% of your prior-year tax liability if your adjusted gross income (AGI) last year was more than $150,000, or $75,000 if you and your spouse file separately.

To avoid this penalty in the future:

  • Increase your W-4 withholdings with your employer.
  • Pay quarterly estimated taxes using Form 1040-ES.

 

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