Immune to the Underpayment Penalty
Do you owe the IRS money? Even if you failed to pay enough tax throughout the year, you may not have to pay the penalty if you fit one of these exceptions.

If you owe $1,000 or more in tax when you file your 2005 return -- and the amount is more than 10% of your total tax bill for the year -- the IRS will assume that you also owe a penalty for failing to pay enough tax during the year via withholding or quarterly estimated tax payments. The penalty is the IRS's not-so-subtle reminder that taxes are due as income is earned, not in April of the following year.
The penalty works a lot like interest on a loan. The rate is currently 7%.
But before you pay the penalty, see if you can fit into one of the exceptions that protects you from it.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
- If you paid in at least 90% of your actual tax bill for 2005 (and any required estimated payments were made on time), for example, the penalty doesn't apply.
- If your payments during 2005 equaled the amount of your 2004 tax bill, forget the penalty -- no matter how much extra you owe when you file. However, as with so many tax rules, there is an exception to the neat 100%-of-last-year's-tax exception. If your 2005 adjusted gross income was more than $150,000, you had to pay in at least 110% of your 2004 tax liability to avoid the underpayment penalty.
Bottom line: Before you pay an underpayment penalty, check the rules carefully for a way around it.
And, even if you owe the penalty, don't worry about tackling the complicated Form 2210 to figure out how much you owe. The IRS will be happy to crunch the numbers for you -- you can double-check the bill when you get it. Letting the agency do that will allow you to hold on to your money for a bit longer. The interest clock stops running as soon as you pay your tax bill with your return; there's no interest charged on the penalty amount if you pay it by the date set on the bill.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

-
How to Break Free From the 'One More Year' Trap and Actually Retire
Despite having more than enough money to retire, some people simply cannot leave their jobs.
-
Stocks Swing Lower as Eli Lilly, Fortinet Spiral: Stock Market Today
The main indexes finished well off their session highs after a disappointing batch of corporate earnings reports.
-
Texas Sales Tax-Free Weekend 2025
Tax Holiday What you need to know about the Texas sales tax holiday.
-
Four Tax Changes Older Adults and Retirees Should Watch in 2025
Tax Changes This year brings key tax changes that could affect your retirement taxes and income.
-
The Most Tax-Friendly State for Retirement in 2025: Here It Is
Retirement Tax How do you retire ‘tax-free’? This state doesn’t tax retirement income, has a low median property tax bill, and even offers savings on gas. Are you ready for a move?
-
Five Ways Trump’s 2025 Tax Bill Could Boost Your Tax Refund (or Shrink It)
Tax Refunds The tax code is changing again, and if you’re filing for 2025, Trump’s ‘big beautiful’ bill could mean a bigger refund, a smaller one or something in between next year. Here are five ways the new law could impact your bottom line.
-
New SALT Deduction Could Put Thousands Back in California Homeowners’ Pockets
Tax Breaks The federal state and local sales tax (SALT) deduction cap is higher this year, and could translate into bigger savings for Golden State homeowners.
-
Money for Your Kids? Three Ways Trump's ‘Big Beautiful Bill’ Impacts Your Child's Finances
Tax Tips The Trump tax bill could help your child with future education and homebuying costs. Here’s how.
-
Why Your Summer Budget Feels Tighter: Tariffs Push Up Inflation
Tariffs Your summer holiday just got more expensive, and tariffs are partially to blame, economists say.
-
Alabama Tax-Free Weekend 2025
Tax Holiday Here’s everything you need to know about the 2025 back-to-school Alabama sales tax holiday.