Tax Tips
Last Chance to Avoid
Underpayment Penalty
January 15 is the deadline for 2009 estimated tax payments.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
January 2010
If you didn’t pay enough to the IRS through payroll withholding or quarterly estimated tax payments last year, you could face a big tax bill when you file your 2009 tax return this spring.
Plus, you might owe significant interest and penalties, too. (Penalties apply only if you owe more than $1,000 when you file your tax return). How could that happen? The tax withholding on your paycheck may be out of whack. Or perhaps you received a big gain from selling stock, or you took an early distribution from a retirement account that is subject to taxes and penalties. In any event, if the amount you paid during the year isn’t equal to 90% of the taxes you owe for 2009 -- or 100% of what you owed for 2008 -- the IRS can slap you with an underpayment penalty. (If your 2009 adjusted gross income is over $150,000, you need to have paid 110% of what you owed for 2008.)
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The penalty for underpayment works like interest on a loan (the money you didn’t pay the government on time); the current rate is 4% a year. If you might come up short, making an estimated tax payment by January 15, 2010, can reduce the penalty you’ll owe when you file your return. Use Form 1040ES to make the payment.
The IRS may waive the penalty if you can show the failure to pay estimated tax was due to a casualty, disaster or other unusual occurrence, or if you retired or became disabled during the year. To apply for a waiver, attach an explanation to Form 2210 to document the reasons for your request.
Reader Comments (3)
Posted by: JERRY BROCKMEYER at 01/14/2010 01:38:46 PM
One overlooked way to avoid the underpayment penalty, and for that matter estimated payments throughout the year, for those of us that are drawing down our IRA, is to have zero withheld for fed income tax throughout the year and then take a distribution in December and have 100% withholding...
Posted by: Kevin McCormally at 01/14/2010 07:04:48 PM
Hi, this is Kevin McCormally from Kiplinger. Just to clarify Jerry Brockmeyer’s comment, the IRS treats withholding at any time of the year as having come in evenly during the year. Employees often use a similar strategy—a supersized withholding from December paychecks—to make up for underwithholding (and avoiding quarterly payments) earlier in the year. So it is a legitimate strategy. Hope this helps.”
Posted by: Robert C. Donnelly at 02/15/2010 02:27:18 PM
How do I obtain a copy of Form 2210 or help in filing it?