The United States income tax is a pay-as-you-go tax, which means that tax must be 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. Most taxpayers will have paid enough tax
to avoid this penalty if, by January 15th of the following year, they have paid at least 90%
of the tax shown on the return for the current year, or 100% of the tax shown on the return for the prior year,
whichever is smaller. However, if your adjusted gross income was greater than $150,000 last year,
or $75,000 if you are married filing separate returns this year, the test is 90% of the current year tax
or 108.6% of your 1999 tax, whichever is smaller. There are also special rules for farmers and fishermen.
In addition, if you made estimated tax payments,
the payments must usually have been in 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 would
reduce or eliminate the penalty.
You will not have to pay a penalty for underpayment of 2000 estimated tax if your tax
liability minus your withholding is less than $1,000. The penalty also will not apply
if you had no tax liability for 1999, you were a U.S. citizen or resident for all of 1999,
and your tax year included all 12 months of the year.
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.
For more information, see
Publication 505, Tax Withholding and Estimated Tax.
Publications may be downloaded from this site,
or ordered by calling 1-800-829-3676.
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