You paid at least 90% of the tax shown on the tax year return or 100% of the tax that appears on the previous year's return, whichever is lower. In general, taxpayers must make estimated tax payments in four equal amounts to avoid a penalty. However, if you receive unevenly income during the year, you can vary the payment amounts to avoid or reduce the penalty using the annualized installment method of payment. Use Form 2210, Underpayment of Estimated Taxes by Individuals, Inheritance and Trusts to see if you must pay a penalty for paying less than your estimated tax.
If you expect your income this year to be lower than last year and you don't want to pay more taxes than you think you'll owe at the end of the year, you can choose to pay 90 percent of your tax bill for the current year. If your total estimated payments and withholding amount to less than 90 percent of what you owe, you may be fined for underpayment. So, you might want to avoid reducing your payments too close to 90 percent to have a safety net. You can request an exemption from the penalty if the underpayment was due to a victim, disaster, or other unusual circumstance that could make its imposition unfair.
Taxpayers should check Form 2210 to determine if they are required to declare an underpayment and pay a penalty. An underpayment penalty is a penalty imposed by the IRS on taxpayers who do not pay a sufficient amount of their estimated taxes, are not withheld from their wages enough, or pay late. If you don't qualify for exceptions to the underpayment penalty, you may be eligible to receive a reduced penalty for underpayment in some situations. If you choose to use this method, you will need to file Form 2210, Underpayment of Estimated Tax by Individuals, Inheritance and Trusts, along with your regular individual income tax return.
If you haven't paid enough income taxes through withholding or estimated quarterly payments at the time you file your return, you may have to pay a penalty for underpayment. If you don't pay enough taxes before the due date of each payment period, you may be charged a penalty for underpaying the tax until the underpayment is made up for the underpayment. Generally, an underpayment penalty can be avoided if the safe harbor rule applies to the payments described below. However, you may still have to pay a penalty for underpayment during the first quarter because the first payment was not made before the April 15 deadline.
The underpayment penalty is imposed when a taxpayer pays less than estimated taxes or makes unequal payments during the tax year that do not adequately correspond to the taxpayer's current income over a period. Recently, the IRS updated its withholding tax estimator, which you can use to calculate the amount of federal income tax deducted from your paycheck. To request an exemption, Form 2210 must be filed, on the underpayment of the estimated tax by individuals, estates and trusts. Making appropriate tax payments throughout the year can make the difference between getting a refund or owing taxes and penalties to the IRS.
If you pay less than the estimated tax, you may be subject to a penalty in the form of interest for underpayment during the period when the underpayment occurred.