Taxing Definitions

Definition — Underestimating the estimate

Thanks for sharing!
2 minute read
Blue magnetic board with math equation 2 plus 2 equals four
Image source: Dreamstime public domain

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?

1

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.

Prior to the waiver, the penalty applied when the required annual payment was less than what percentage of current year tax due?

or

2

True or false? The penalty waiver available under notice 2019-11 is automatic.

or

3

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.

or

***

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.

***

Other posts you might enjoy

Definition — Laughter and other medical dedu... Image source: openclipart.org Laughter may be the best medicine, but it's also one you can't get a tax deduction for. Fortunately, plenty of other medical expenses qualify. What are those expenses? Here's a quiz to test your knowledge. 1 As a general rule, when adding up you...
Definition — Old or new? Image source: Benjamin Wong on Unsplash The December 2017 federal income tax law changed certain business tax items beginning with 2018 filings. Do you know which of the following statements are from the new law? Deduction for meals and entertainment A A business can deduct ...
Definitions — More and less, yes or no   Image source: openclipart.org   In general, you're required to file a federal income tax return when your gross income is equal to or exceeds the sum of your exemption plus standard deduction (internal revenue code section 6012(a)(1)). For 2018 returns, to be filed in 2019, the...
Definition — Interesting changes   Image source: openclipart.org   The home mortgage interest deduction was one of the itemized deductions changed by the December 2017 tax law that takes effect for 2018 federal income tax returns. Because the rule was modified and not entirely gutted, some of the old rules st...
✓ Right answer!

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%.
Sorry, wrong answer :(
Sorry, wrong answer :(
✓ Right answer!

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.
✓ Right answer!

Per notice 2019-11, this waiver is in addition to any other exception that section 6654 provides to the underpayment of estimated income tax.
Sorry, wrong answer :(
Tagged ,