Exceptions

Generally, you do not have to pay an underpayment penalty if either of the following conditions apply:

• Your total tax is less than $1,000, or
• You had no tax liability last year.

Less Than $1,000 Due

You do not owe a penalty if the total tax shown on your return minus the amount you paid through withholding (including excess social security and railroad retirement tax withholding) is less than $1,000.

Total tax for 2000. For 2000, your total tax on Form 1040 is the amount on line 57 reduced by the total of the following seven amounts.

1. Any recapture of a federal mortgage subsidy from Form 8828 included on line 57.
2. Any social security or Medicare tax on tips not reported to your employer on line 53.
3. Any tax on excess contributions to IRAs and medical savings accounts, and any tax on excess accumulations in qualified retirement plans from Form 5329 included on line 54.
4. Any uncollected social security, Medicare, or railroad retirement tax included on line 57.
5. Any earned income credit on line 60a.
6. Any additional child tax credit on line 63.
7. Any credit for federal tax on fuels from Form 4136 included on line 64.

Your total tax on Form 1040A is the amount on line 35 minus the amount on lines 38a and 39. Your total tax on Form 1040EZ is the amount on line 10 minus the amount on line 8a.

Paid through withholding. For 2000, the amount you paid through withholding on Form 1040 is the amount on line 58 plus any excess social security or railroad retirement tax withholding on line 61. On Form 1040A, the amount you paid through withholding is the amount on line 36, plus any excess social security or railroad retirement tax withholding included in the total on line 40. On Form 1040EZ, it is the amount on line 7.

No Tax Liability Last Year

You do not owe a penalty if you had no tax liability last year and you were a U.S. citizen or resident for the whole year. For this rule to apply, your tax year must have included all 12 months of the year.

You had no tax liability for 1999 if your total tax was zero or you did not need to file an income tax return.

Example 4.3. Ray, who is single and 22 years old, was unemployed for most of 1999. He earned $2,700 in wages before he was laid off, and he received $2,500 in unemployment compensation afterwards. He had no other income. Even though he had gross income of $5,200, he did not have to pay income tax because his gross income was less than the filing requirement for a single person under age 65 ($7,050 for 1999). He filed a return only to have his withheld income tax refunded to him.

In 2000, Ray began regular work as an independent contractor. Ray made no estimated tax payments in 2000. Even though he did owe tax at the end of the year, Ray does not owe the underpayment penalty for 2000 because he had no tax liability in 1999.

Total tax for 1999. For 1999, your total tax on Form 1040 is the amount on line 56 reduced by the total of the following seven amounts.

1. Any recapture of a federal mortgage subsidy from Form 8828 included on line 56.
2. Any social security or Medicare tax on tips not reported to your employer on line 52.
3. Any tax on excess contributions to IRAs and medical savings accounts, and any tax on excess accumulations in qualified retirement plans from Form 5329 included on line 53.
4. Any uncollected social security, Medicare, or railroad retirement tax included on line 56.
5. Any earned income credit on line 59a.
6. Any additional child tax credit on line 60.
7. Any credit for federal tax on fuels from Form 4136 included on line 63.

Your total tax on Form 1040A is the amount on line 34 minus the amount on lines 37a and 38. Your total tax on Form 1040EZ is the amount on line 10 minus the amount on line 8a.

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