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 1000.
  • The tax you paid was less than the smaller of:
    • 0.9 of your current tax liability
    • 1 of your prior-year tax liability
    • 110% of your prior-year tax liability if your adjusted gross income (AGI) last year was more than 150000, or 75000 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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