If you did not pay enough tax either through withholding or by making estimated tax payments, you will have an underpayment of estimated tax and you may have to pay a penalty. Generally, you will not have to pay a penalty for 1999 if any of the following situations apply to you.

• The total of your withholding and estimated tax payments was at least as much as your 1998 tax, you are not subject to the special rule limiting use of the prior year's tax, and you paid all required estimated tax payments on time.
• The tax balance due on your return is no more than 10% of your total 1999 tax, and you paid all required estimated tax payments on time.
• Your total 1999 tax (defined later) minus your withholding is less than $1,000.
• You did not owe tax for 1998.
• You did not have any withholding taxes and your current year tax less any household employment taxes is less than $1,000.

Special rules apply if you are a farmer or fisherman. See Farmers and Fishermen in chapter 4 of Publication 505 for more information.

IRS can figure the penalty for you. If you think you owe the penalty but you do not want to figure it yourself when you file your tax return, you may not have to. Generally, the IRS will figure the penalty for you and send you a bill. However, you must complete Form 2210 and file it with your return if you check any of the boxes in Part I of the form. See Reasons for filing later in this section.

General Rule

In general, you may owe a penalty for 1999 if the total of your withholding and estimated tax payments did not equal at least the smaller of:

1. 90% of your 1999 tax, or
2. 100% of your 1998 tax. (Your 1998 tax return must cover a 12-month period.)

Special rules for certain individuals. There are special rules for farmers and fishermen and for certain higher income taxpayers.

Farmers and fishermen. If at least two-thirds of your gross income for 1998 or 1999 is from farming or fishing, substitute 66 2/3% for 90% in (1) above.

See Farmers and Fishermen in chapter 4 of Publication 505 for more information.

Higher income taxpayers. If less than two-thirds of your gross income for 1998 and 1999 is from farming or fishing and your adjusted gross income (AGI) for 1998 was more than $150,000 ($75,000 if your filing status is married filing a separate return in 1999), substitute 105% for 100% in (2) above.

For 1998, AGI is the amount shown on Form 1040 -- line 34; Form 1040A -- line 19; and Form 1040EZ -- line 4.

Penalty figured for each period. Because the penalty is figured separately for each payment period, you may owe a penalty for an earlier payment period even if you later paid enough to make up the underpayment. If you did not pay enough tax by the due date of each of the payment periods, you may owe a penalty even if you are due a refund when you file your income tax return.

Example. You did not make estimated tax payments during 1999 because you thought you had enough tax withheld from your wages. Early in January 2000, you made an estimate of your total 1999 tax. You then realized that your withholding was $2,000 less than the amount needed to avoid a penalty for underpayment of estimated tax.

On January 11, you made an estimated tax payment of $3,000, the difference between your withholding and your estimate of your total tax. Your final return shows your total tax to be $50 less than your estimate, so you are due a refund.

You do not owe a penalty for your payment due January 15, 2000. However, you may owe a penalty through January 11 for your underpayments for the earlier payment periods.

Minimum required each period. You will owe a penalty for any 1999 payment period for which your estimated tax payment plus your withholding for the period and overpayments for previous periods was less than the smaller of:

1. 22.5% of your 1999 tax, or
2. 25% of your 1998 tax. (Your 1998 tax return must cover a 12-month period.)

Note. If you are subject to the rule for higher income taxpayers, discussed earlier, substitute 26.25% for 25% in (2) above.

When penalty is charged. If you miss a payment or you paid less than the minimum required in a period, you may be charged an underpayment penalty from the date the amount was due to the date the payment is made.

1998 separate returns and 1999 joint return. If you file a joint return with your spouse for 1999, but you filed separate returns for 1998, your 1998 tax is the total of the tax shown on your separate returns. You filed a separate return for 1998 if you filed as single, head of household, or married filing separately.

1998 joint return and 1999 separate returns. If you file a separate return for 1999, but you filed a joint return with your spouse for 1998, your 1998 tax is your share of the tax on the joint return. You filed a separate return for 1999 if you filed as single, head of household, or married filing separately. To figure your share, first figure the tax both you and your spouse would have paid had you filed separate returns for 1998, using the same filing status as in 1999. Then multiply your joint tax liability by the following fraction:

Formula-chapter 5

Example. Lisa and Paul filed a joint return for 1998 showing taxable income of $48,000 and a tax of $7,942. Of the $48,000 taxable income, $40,000 was Lisa's and the rest was Paul's. For 1999, they file married filing separately. Lisa figures her share of the tax on the 1998 joint return as follows:

Tax on $40,000 based on a separate  return	$ 8,454
Tax on $8,000 based on a separate  return	1,204
Total	$ 9,658
Lisa's portion of total ($8,454 � $9,658)	88%
Lisa's share of 1998 joint return tax  ($7,942 � 88%)	$ 6,989

Form 2210.
In most cases, you do not need to file Form 2210. The IRS will figure the penalty for you and send you a bill. If you want to figure your penalty, complete Part I, Part II, and either Part III or Part IV of Form 2210. Do not file Form 2210 unless you must file it, as explained later under Reasons for filing. If you use Form 2210, you cannot file Form 1040EZ.

On Form 1040, enter the amount of your penalty on line 69. If you owe tax on line 68, add the penalty to your tax due and show your total payment on line 68. If you are due a refund, subtract the penalty from the overpayment you show on line 65.

On Form 1040A, enter the amount of your penalty on line 44. If you owe tax on line 43, add the penalty to your tax due and show your total payment on line 43. If you are due a refund, subtract the penalty from the overpayment you show on line 40.

Reasons for filing.
You may be able to lower or eliminate your penalty if you file Form 2210. You must file Form 2210 with your return if any of the following applies.

• You request a waiver. See Waiver of Penalty, later.
• You use the annualized income installment method.
• You use your actual withholding for each payment period for estimated tax purposes.
• You base any of your required installments on the tax shown on your 1998 return and you filed or are filing a joint return for either 1998 or 1999 but not for both years.

For help in completing Form 2210, including illustrated examples, see chapter 4 of Publication 505.

Annualized income installment method.
If you did not receive your income evenly throughout the year (for example, your income from a repair shop you operated was much larger in the summer than it was during the rest of the year), you may be able to lower or eliminate your penalty by figuring your underpayment using the annualized income installment method. Under this method, your required installment for one or more payment periods may be less than one-fourth of your required annual payment.

To figure your underpayment using this method, complete Schedule AI of Form 2210. Also check the box on line 1b in Part I of Form 2210. You must file the form and Schedule AI with your return. This method is explained in chapter 4 of Publication 505.

Actual withholding method.
Instead of using one-fourth of your withholding to figure your payments, you can choose to establish how much was actually withheld by the due dates and use those amounts. You can make this choice separately for the tax withheld from your wages and for all other withholding.

Using your actual withholding may result in a smaller penalty if most of your withholding occurred early in the year.

If you use your actual withholding, you must check the box on line 1c, Part I of the Form 2210. Complete Form 2210 and file it with your return.

Short method for figuring the penalty.
You may be able to use the short method in Part III of Form 2210 to figure your penalty for underpayment of estimated tax. If you qualify to use this method, it will result in the same penalty amount as the regular method, but with fewer computations.

You can use the short method only if you meet one of the following requirements.

1. You made no estimated tax payments for 1999. It does not matter whether you had income tax withholding; or
2. You paid estimated tax in four equal amounts on the due dates.

Note.
If any payment was made earlier than the due date, you can use the short method, but using it may cause you to pay a larger penalty than using the regular method. If the payment was only a few days early, the difference is likely to be small.

If you do not meet either requirement, figure your penalty using the regular method in Part IV, Form 2210.

Note.
If you use the short method in Part III, you cannot use the annualized income installment method or the actual withholding method.

Exceptions

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

• Your total tax due 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 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 for 1999 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.

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 1998 if your total tax was zero or you did not need to file an income tax return.

Example.
Ray, who is single and age 22, was unemployed for most of 1998. 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 ($6,950 for 1998). He filed a return only to have his withheld income tax refunded to him.

In 1999, Ray began regular work as an independent contractor. Ray made no estimated tax payments in 1999. Even though he did owe tax at the end of the year, Ray does not owe the underpayment penalty for 1999 because he had no tax liability in 1998.

Total tax for 1998.
For 1998, 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.

Waiver of Penalty

The IRS can waive the penalty for underpayment if:

1. You did not make a payment because of 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, and both the following requirements are met:
   1. You had a reasonable cause for not making the payment, and
   2. Your underpayment was not due to willful neglect.

To claim a waiver, follow the procedures explained in the instructions for Form 2210.

Previous | Next

Publication 17 | 1999 Tax Year Archives | Tax Help Archives | Home