9.5 Estimated Tax: Penalty Questions
What is the minimum amount of estimated tax that I am required to
pay without incurring any penalty or interest charges?
In general, you may owe a penalty for 2003 if the total of your withholding
and estimated tax payments did not equal at least the smaller of:
90% of your 2003 tax (current year tax), or
100% of your 2002 tax (prior year tax). (Your 2002 tax return must cover
a 12-month period.)
Your 2003 tax, for this purpose, is your Total tax for 2003. There are
special rules for farmers and fishermen, and for certain higher income taxpayers.
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, (less withholding and credits) or
You had no tax liability last year.
Farmers and fishermen. If at least two-thirds of your
gross income for 2002 or 2003 is from farming or fishing, you are required
to make one installment equal to 66 2 /3% of your 2003 tax (current year tax).
Higher income taxpayers. If less than two-thirds of your gross income for
2003 or 2002 is from farming or fishing and your adjusted gross income (AGI)
for 2002 was more than $150,000 ($75,000 if your filing status is married
filing a separate return in 2002), substitute 110% for 100% in (2) above.
References:
What is meant by "no tax liability" in the exceptions to the estimated
tax penalty?
You do not have to pay estimated tax for 2003 if you meet all three of
the following conditions.
1. You had no tax liability for 2002.
2. You were a U.S. citizen or resident for the whole year.
3. Your 2002 tax year covered a 12-month period.
You had no tax liability for 2002 if your total tax was zero or you did
not have to file an income tax return.
Total tax for 2002. Your 2002 total tax on Form 1040 (PDF) is the amount on line 61 reduced by the total
of the amounts on line 57, 64, and 66, any credit from Form 4136 (PDF) included on line 68, any recapture of a federal mortgage subsidy
and any uncollected social security, Medicare, or railroad retirement tax
included on line 61, and any tax on excess contributions to IRAs and medical
savings accounts, and on excess accumulations in qualified retirement plans
from Forms 5329 included on line 58.
On Form 1040A (PDF) , it is line 38 reduced
by the amount on line 41 and 42. On Form 1040EZ (PDF) ,
it is line 10 reduced by line 8.
For additional information on this topic refer to Form 1040ES (PDF), Estimated Tax for Individuals , and Publication 505, Tax Withholding and Estimated Tax .
References:
I was a student in 2002 and had no income. In 2003, I started working
and did not have enough tax withheld. Will I owe a penalty because I did not
make estimated tax payments?
You will not have to pay a penalty for 2003 if you did not owe tax for
2002. For additional information on the penalty for underpayment of estimated
tax, refer to Tax Topic 306 , Penalty for Underpayment of Estimated
Tax. For information on how to increase the amount of tax withheld by
your employer, refer to Tax Topic 753, Form W-4 (PDF) , Employee's Withholding Allowance Certificate .
For information on estimated tax requirements, refer to Tax Topic 355, Estimated
Tax or Publication 505, Tax Withholding and Estimated Tax .
References:
I was late mailing my estimated tax payment. To minimize the penalty,
how do I compute the interest rate and late payment charges in order to send
an additional check to the IRS as soon as possible?
The failure to pay estimated tax penalty is based upon the number of days
that the payment is late and the current interest rate. Therefore, we cannot
give a percentage that applies for all cases. To compute the amount of the
estimated tax penalty you will need to refer to Publication 505, Tax
Withholding and Estimated Tax and Form 2210 (PDF), Underpayment
of Estimated Tax by Individuals, Estates and Trusts for directions on
computing the penalty. Since the computations can get rather complicated,
you may want to just send in the estimated tax payment and wait for a bill
from us for the penalty.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment
of Estimated Tax by Individuals, Estates and Trusts
Why should I owe a penalty for failing to pay estimated taxes when
I received a refund for the prior year?
Since the estimated tax penalty is based upon your prior or current year
income tax liability (not withholding or estimated tax payments), you may
be subject to the penalty even if you had a refund for your prior year return.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment
of Estimated Tax by Individuals, Estates and Trusts
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