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 through tax withholding and the other is through 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 15th 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 underpayment of 1997 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 1996, you were a U.S. citizen or resident for all of 1996, and you filed (or
would have been able to file) a 1996 tax return for a tax year of 12 full months.
Also, the penalty may be waived if:
- 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
- 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.
- No penalty will be imposed to any underpayment that was created or increased by the 1997
tax act.
For more information, order Publication 505, Tax With-holding
and Estimated Tax, by calling 1-800-829-3676.
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