Underpayment Penalty for 2001

Important Change

Penalty rate.   The penalty for underpayment of 2001 estimated tax is figured at an annual rate of 8% for the number of days the underpayment remained unpaid from April 16, 2001, through June 30, 2001; 7% from July 1, 2001, through December 31, 2001; and 6% from January 1, 2002, through April 15, 2002.

Important Reminders

Household employment taxes.   When figuring the penalty for failure to pay estimated income tax, you generally must include with your estimated taxes any household employment taxes that you may have to pay.

Failure to pay estimated tax.   You will not be liable for the penalty for failure to pay estimated income tax 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.

Exception to use of prior year's tax.   Certain taxpayers (other than farmers and fishermen) must use 110% of their 2000 tax to figure any 2001 underpayment penalty. See Higher income taxpayers under General Rule, later.

Introduction

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.

Having completed copies of your latest federal income tax returns may help you through this chapter.

No penalty.   Generally, you will not have to pay a penalty for 2001 if any of the following situations applies.

• The total of your withholding and estimated tax payments was at least as much as your 2000 tax (or 110% of your 2000 tax if your adjusted gross income was more than $150,000 - $75,000 if your 2001 filing status is married filing separately), 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 2001 tax, and you paid all required estimated tax payments on time.
• Your total 2001 tax (defined later) minus your withholding is less than $1,000.
• You did not have a tax liability for 2000.
• 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.

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 or Form 2210-F and attach it to your return if you are able to lower or eliminate your penalty. See Form 2210, later.

Topics

This chapter discusses:

• The general rule for the underpayment penalty,
• Special rules for certain individuals,
• Exceptions to the underpayment penalty,
• How to figure your underpayment and the amount of your penalty on Form 2210, and
• How to ask IRS to waive the penalty.

Useful Items You may want to see:

Form (and Instructions)

• 2210   Underpayment of Estimated Tax by Individuals, Estates, and Trusts
• 2210-F   Underpayment of Estimated Tax by Farmers and Fishermen

See chapter 5 for information about getting these forms.

General Rule

In general, you may owe a penalty for 2001 if the total of your withholding and estimated tax payments did not equal at least the smaller of:

1. 90% of your 2001 tax, or
2. 100% of your 2000 tax. (Your 2000 tax return must cover a 12-month period.)

Your 2001 tax, for this purpose, is your Total tax for 2001, defined under Exceptions, later.

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 2000 or 2001 is from farming or fishing, substitute 662/3% for 90% in (1) above.

See Farmers and Fishermen later.

Higher income taxpayers.   If less than two-thirds of your gross income for 2000 and 2001 is from farming or fishing and your adjusted gross income (AGI) for 2000 was more than $150,000 ($75,000 if your filing status is married filing a separate return in 2001), substitute 110% for 100% in (2) above.

For 2000, 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 a 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 any of the payment periods, you may owe a penalty even if you are due a refund when you file your income tax return.

Example 4.1.   You did not make estimated tax payments for 2001 because you thought you had enough tax withheld from your wages. Early in January 2002, you made an estimate of your total 2001 tax. Then you 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, 2002. However, you may owe a penalty through January 11, 2002 for your underpayments for the earlier payment periods.

Minimum required each period.   You will owe a penalty for any 2001 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 2001 tax, or
2. 25% of your 2000 tax. (Your 2000 tax return must cover a 12-month period.)

Note.   If you are subject to the rule for higher income taxpayers, discussed earlier, substitute 27.5% 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.

Trust payments of estimated tax credited to you.   If you were a beneficiary of an estate or trust that credited its estimated tax payments to you, treat the amount credited (line 14a of Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, Etc.) as an estimated tax payment made by you on January 15, 2002.

Amended returns.   If you file an amended return by the due date of your original return, use the tax shown on your amended return to figure your required estimated tax payments. If you file an amended return after the due date of the original return, use the tax shown on the original return.

However, if you and your spouse file a joint return after the due date to replace separate returns you originally filed by the due date, use the tax shown on the joint return to figure your required estimated tax payments. This rule applies only if both original separate returns were filed on time.

2000 separate returns and 2001 joint return.   If you file a joint return with your spouse for 2001, but you filed separate returns for 2000, your 2000 tax is the total of the tax shown on your separate returns. You filed a separate return if you filed as single, head of household, or married filing separately.

2000 joint return and 2001 separate returns.   If you file a separate return for 2001, but you filed a joint return with your spouse for 2000, your 2000 tax is your share of the tax on the joint return. You filed a separate return if you filed as single, head of household, or married filing separately.

To figure your share of the taxes on a joint return, first figure the tax both you and your spouse would have paid had you filed separate returns for 2000 using the same filing status as for 2001. Then multiply the tax on the joint return by the following fraction:

The tax you would have paid had you filed a separate return

The total tax you and your spouse would have paid had you filed separate returns

Example 4.2.   Lisa and Paul filed a joint return for 2000 showing taxable income of $48,000 and a tax of $7,747. Of the $48,000 taxable income, $40,000 was Lisa's and the rest was Paul's. For 2001, they file married filing separately. Lisa figures her share of the tax on the 2000 joint return as follows:

2000 Tax on $40,000 based on a separate return	$ 8,357
2000 Tax on $8,000 based on a separate return	1,204
Total	$ 9,561
Lisa's percentage of total ($8,357 ÷ $ 9,561)	87.41%
Lisa's percentage of tax on joint return ($7,747 × 87.41%)	$ 6,772

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 us to figure the penalty for you, leave the penalty line on your return blank. Do not file Form 2210. If you want to figure your penalty, complete Part I, Part II, and either Part III or Part IV of Form 2210. See Reasons for filing to determine whether you should file Form 2210. If you use Form 2210, you cannot file Form 1040EZ.

On Form 1040, enter the amount of your penalty on line 71. If you owe tax on line 70, add the penalty to your tax due and show your total payment on line 70. If you are due a refund, subtract the penalty from the overpayment you show on line 67.

On Form 1040A, enter the amount of your penalty on line 46. If you owe tax on line 45, add the penalty to your tax due and show your total payment on line 45. If you are due a refund, subtract the penalty from the overpayment you show on line 42.

Lowering or eliminating the penalty.   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. See the explanation of this method under Figuring Your Underpayment, later.
• You use your actual withholding for each payment period for estimated tax purposes. See Actual withholding method under Figuring Your Underpayment, later.
• You base any of your required installments on the tax shown on your 2000 return and you filed or are filing a joint return for either 2000 or 2001 but not for both years.

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 2001.   For 2001, your total tax on Form 1040 is the amount on line 58 reduced by the total of the following amounts.

1. Any recapture of a federal mortgage subsidy from Form 8828 included on line 58.
2. Any social security or Medicare tax on tips not reported to your employer on line 54.
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 55.
4. Any uncollected social security, Medicare, or railroad retirement tax included on line 58.
5. Any earned income credit on line 61a.
6. Any additional child tax credit on line 63.
7. Any credit for federal tax on fuels from Form 4136 included on line 65.

Your total tax on Form 1040A is the amount on line 36 minus the amount on lines 39a and 40. Your total tax on Form 1040EZ is the amount on line 11 minus the amount on line 9a.

Paid through withholding.   For 2001, the amount you paid through withholding on Form 1040 is the amount on line 59 plus any excess social security or railroad retirement tax withholding on line 62. On Form 1040A, the amount you paid through withholding is the amount on line 37, plus any excess social security or railroad retirement tax withholding included in the total on line 41. On Form 1040EZ, it is the amount on line 8.

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 2000 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 2000. 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 ($7,200 for 2000). He filed a return only to have his withheld income tax refunded to him.

In 2001, Ray began regular work as an independent contractor. Ray made no estimated tax payments in 2001. Even though he did owe tax at the end of the year, Ray does not owe the underpayment penalty for 2001 because he had no tax liability in 2000.

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 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 62.
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.

Figuring Your Required Annual Payment

Figure your required annual payment in Part II of Form 2210, following the line-by-line instructions. If you rounded the entries on your return to whole dollars, you can round on Form 2210.

Example 4.4.   The tax on Ivy Fields' 2000 return was $10,000 (her AGI was not more than $150,000). The tax on her 2001 return (Form 1040, line 40) is $11,000. She does not claim any credits or pay any other taxes.

For 2001, Ivy had $1,600 income tax withheld and paid $6,800 estimated tax. Her total payments were $8,400. 90% of her 2001 tax is $9,900. Because she paid less than her 2000 tax and less than 90% of her 2001 tax, and does not meet an exception, Ivy knows that she owes a penalty for underpayment of estimated tax. She decides to figure the penalty on Form 2210 and pay it with her $2,600 tax balance when she files her tax return.

Ivy's required annual payment is $9,900 ($11,000 × 90%) because that is smaller than her 2000 tax.

Ivy's filled-in Form 2210 is shown at the end of this chapter. Her required annual payment of $9,900 is shown on line 14.

Different 2000 filing status.   If you file a separate return for 2001, but you filed a joint return with your spouse for 2000, see 2000 joint return and 2001 separate returns, earlier, to figure the amount to enter as your 2000 tax on line 13 of Form 2210.

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