Last Chance to Avoid Underpayment Penalty

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.)

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.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

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.

Sign up

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.