Never underestimate the value of fun or tax payments. You’ll pay the price in the long run.
As a general rule, you’re required to pay federal income tax as you earn income. The payments can be in the form of tax withholding from wages or pensions, or a separate payment of the amount of tax you estimate you’ll owe on the income you earn, or a combination of both.
Estimated taxes are due four times a year, in April, June, September, and January, and each installment is typically supposed to be 25% of the annual amount of tax due on your income.
When you underestimate the amount of tax you owe, and pay in less than the amount due with your tax return, you may have to pay a penalty.
How familiar are you with the estimated tax underpayment penalty?
For 2018 federal income tax returns (the one you’ll file in April 2019), the IRS recently released a penalty waiver for certain taxpayers who underestimated the amount of tax owed for the year.
Under notice 2019-11, the estimated tax underpayment penalty will be waived for individual taxpayers whose total withholding and estimated tax payments equal or exceed 85% of the tax shown on the return for the 2018 taxable year.
NOTE: The IRS issued Notice 2019-25 on March 22, 2019. This notice amends notice 2019-11 and lowers the threshold to 80% of the tax shown on the return for the 2018 taxable year. To request this waiver, file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with the 2018 federal income tax return. Complete Part I of Form 2210 and the worksheet included in the form instructions to determine if the waiver in this notice applies. If the waiver applies, check the waiver box (Part II, Box A), include the statement “80% Waiver” next to Box A, and file page 1 of Form 2210 with the return.
Prior to the waiver, the penalty applied when the required annual payment was less than what percentage of current year tax due?
True or false? The penalty waiver available under notice 2019-11 is automatic.
True or false? The penalty waiver available under notice 2019-11 is in addition to any other exception taxpayers can use to reduce or eliminate the penalty for underpayment of estimated income tax.
Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions and IRS documents. The full documentation may include facts and issues not presented here. Please use the link provided in the post to read the entire document.
This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.
Normally, the penalty would not apply for 2018 if tax payments during the year met one of the following tests:
Tax payments were at least 90% of total 2018 tax liability or
Tax payments were at least 100% of 2017 tax liability.
Editorial note: The 100% threshold is increased to 110% if adjusted gross income is more than $150,000 ($75,000 when married filing separately).
The waiver changes the 90% threshold to 85%.
To request this waiver, individual taxpayers must file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with 2018 federal income tax returns. The form can be used with returns filed electronically or on paper. Taxpayers complete Part I of Form 2210 and the worksheet included in the form instructions to determine if the waiver applies, check the waiver box (Part II, Box A), and include the statement "85% Waiver" with the return.
Per notice 2019-11, this waiver is in addition to any other exception that section 6654 provides to the underpayment of estimated income tax.