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Underpayment of Estimated Tax

Underpayment of Estimated Tax

The US tax system is a payment system. Generally, you have to pay taxes as you earn. Otherwise, you will be fined for the late payment of the estimated costs. The estimated quarterly payments must be made if any of them apply: if your withholding tax does not cover all income and your employer does not withhold tax from your salary.

The estimated costs are paid: on April 15, June 15, September 15, and January 15 of the following year. If either of these days falls on a weekend or a public holiday, payment must be made on the next business day.


Penalties for Late Payment of Estimated Taxes

When it comes to estimating overdue tax payments, include all payments made after the due date in the total amount paid in the following quarter.

For example, if the second quarter payment was due on June 15, 2012, and you paid it two weeks after the due date, the IRS will consider the payment made in the third quarter. You will receive a notification from the Internal Revenue Service (IRS) informing you of the penalties and estimated tax rates.


Underpayment of Estimated Tax

You may be required to pay a payment penalty if both apply:

  • Estimated tax payments are not made during the year.

  • The amount withheld from other income is less than 90% of the tax bill.

To avoid a penalty for underpayment, estimate your tax payments if you have self-employment income and/or have other income that has not been withheld.

The IRS uses this system to calculate the penalty for estimated unpaid tax payments:

  • When you file your bank statement, the IRS calculates the amount of tax you should have paid each quarter.

  • The IRS applies a percentage (penalty) to calculate the penalty amount for each quarter.

  • The amount of the fine for each quarter is added to calculate the default penalty you owe.


Allow the IRS to calculate your penalty.

If you've already paid fewer taxes, one of your options is to allow the IRS to calculate your penalty. You can allow the IRS to calculate your penalty if:

  • The exceptions do not apply to you.

  • You did not submit Form 2210.

  • You did not withhold enough taxes at the end of the year.

Generally, the IRS will calculate the penalty if you do not pay the amount owed by the date shown on the IRS invoice. In some scenarios, you may need to complete Form 2210.


When The Penalty Is Not Applied

The IRS will not apply a penalty if certain exceptions apply. If you qualify for an exception, the estimated tax payments are not the same as withholding tax.

There are exceptions to the sanction and situations where the sanction does not apply, including:

  • At least 90% of taxes this year were withheld from wages.

  • The amount owed this year is greater than the withholding tax, up to a maximum of $ 1,000.

  • The previous year you owed taxes, and this year that amount or more was withheld from your pay. However, if your Adjusted Gross Income (AGI) exceeds $150,000 or $75,000 if you are married, filing separately, you must pay at 110% of the previous year's tax.

  • The total withholding taxes and quarterly tax payments were at least equal to the previous year's taxes.

  • You had no withholding tax, and your 2019 tax is less than $ 1,000.

  • You have had no tax liability in the past year and have been a US citizen or foreign resident for the entire year.


Means of reducing or eliminating the penalty

If the exemptions do not apply to you, you can always reduce or avoid the penalty you owe. To do this, you must file Form 2210.

File a Form 2210, if any of these is applicable:

  • A victim or disaster has occurred, so it is not fair for the IRS to impose the punishment. Attach a return statement to explain the loss or disaster.

  • Numerous tax payments were made at the start of the year. For example, you overpaid last year's return on this year's taxes.

  • The estimated quarterly payments were appropriate and timely for your tax situation. E.g., You owed $ 20,000 in taxes and paid $ 5,000 each quarter.

  • The status of your order has changed in marriage by submitting a joint statement. If you got married this year and both filed it last year, you can usually combine the previous year's tax on your income tax return and the previous year's tax in your spouse's income tax return. 

  • You are a farmer or fisherman, and withholding tax plus estimated quarterly tax payments are at least 66.67% of your 2019 tax.

  • You are retired or disabled, and your underpayment is due to reasonable cause and not intentional negligence. Attach a statement to your statement explaining the reason for the underpayment.

  • You generated a large portion of your income at the end of the year. E.g., you sold an investment in December and made a profit.


Avoid a fine by changing your Withholding.

If you find out before the end of the year that you owe more taxes than you remember, you can complete a new Form W-4 with your employer.

If you withheld the full amount of taxes at the end of the year, you would not be penalized.

You will not get the same result if you make an estimated payment. If you make an estimated payment at the end of the year, the date is important for calculating the penalty.


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