Everything You Need To Know About Penalty For Underpayment of Estimated Tax.

Everything You Need To Know About Penalty For Underpayment of Estimated Tax.

Underpayment of estimated tax is a tax penalty which is charged to an individual for not paying enough of his/her estimated tax and withholding. IRS provides Form 2210 to underpaying taxpayers, in which taxpayer determines how much they owe and can compare it to the amount IRS has already received. By subtracting any withholdings, taxes, and payments they will find out the outstanding amount.

Ways in which Underpayment of tax penalty can be avoided or reduced:

• If the taxpayer owes less than $1000, after subtracting their withholding and refundable credits or if they paid the smaller of at least 90% of the tax owed for the current year or paid 100% of the tax shown on the tax return for the previous year (2016 return must cover 12 months) they don't have to pay this penalty.
• Taxpayers must pay quarterly installments of their estimated tax in amounts figured by the regular installment method. If a taxpayer has fluctuating income they may end up paying less on quarterly basis resulting in underpayment penalties. Through the use of the annualized income installment method, taxpayers may more accurately estimate their taxes.
• Taxpayer generated a large part of their income later in the year.
• If a taxpayer discovers before the end of the year that they will owe more taxes than their withholding, they can file a new W-4 form with their employer. If at the end of 2017 they have withheld the full amount of taxes, they won’t be penalized.
• The taxpayer has already paid a large amount earlier in the year. For example, if a taxpayer has applied a large overpayment from last year’s return to this year’s taxes.

 There are certain conditions in which IRS waives off the penalty

• You could not make a required payment because of a casualty event, disaster, or other unusual circumstance.
• You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.

Source: www.irs.gov , www.hrblock.com