1996 Tax Help Archives  

Penalty for Underpayment of Estimated Tax

This is archived information that pertains only to the 1996 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

The United States tax system is a pay-as-you-go system, which means that tax is paid as you earn or receive your income during the year. There are two ways to pay as you go. One is thru tax withholding and the other is thru estimated tax payments. Topic 355 provides information on paying estimated tax. If you do not pay enough tax through withholding or estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. You will usually have paid enough tax if, by January 15 of the following year, you have paid at least 90% of the tax owed for the current year, or 100% of the total tax liability for the prior year, whichever is smaller. In addition, if this tax was paid through estimated tax payments, the payments must usually have been for approximately equal amounts to avoid a penalty. However, if you made unequal payments because your income was received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income. Use Form 2210, Underpayment of Estimated Tax by Individuals and Fiduciaries, to see if annualizing will help you reduce or eliminate the penalty.

There are certain instances when no underpayment penalty will be assessed.

You will not have to pay a penalty for under-payment of 1996 estimated tax if your tax liability minus your withholding is less than $500. The penalty also will not apply if you had no tax liability for 1995, you were a U.S. citizen or resident for all of 1995, and you filed (or would have been able to file) a 1995 tax return for a tax year of 12 full months.

Also, the penalty may be waived if:

1.the failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty; or

2.you retired (after reaching age 62) or became disabled during the tax year a payment was due or during the preceding tax year, you had reasonable cause for not making the payment, and the underpayment was not due to willful neglect.

For more information, refer to Publication 505, Tax With-holding and Estimated Tax.

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