Topic 306 - Penalty for Underpayment of Estimated Tax The United States income tax is a payâasâyouâgo 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. Tax 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 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 in 2000, or $75,000 if you are married filing a separate return, the test is 90% of the tax shown on your 2001 tax return, or 110% of your 2000 tax, whichever is smaller. There are also special rules for farmers and fishermen. Additionally, the payments must usually have been in approximately four 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 (PDF), 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 2001 estimated tax if your tax liability minus your withholding and credits is less than $1,000. The penalty also will not apply if you had no tax liability for 2000, you were a U.S. citizen or resident for all of 2000, 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, refer to Publication 505 (PDF), Tax Withholding and Estimated Tax. http://www.irs.gov/individuals/household/display/0,,i1=1&i2=8&genericId=16178,00.html
Estimated Taxes have a few additional rules, particularly with respect to the payout of estimated tax. There may be cases - in addition to those mentioned - where you need not send in "four equal payments". Read the IRS publications and/or check with a tax advisor ......
Crazy, If the bulk of your income was in qtr 3 and 4 you may be able to minimize the penalty. Look under the section of Estimated taxes for annualization. If you are using an electronic tax product you should try revalculating to see if this avoids/minimizes the penalty. Good Luck. But please remember that your tax dollars go to good things like sheets for statues (10K) and 5 billion or so to inflate the price americans pay for sugar.
trdrmac, I thought that the annualization thing was only for farmers? Are you sure traders can use it?
o2b, 100% positive. Anyone who has an inconsistent income stream can use it. It goes on 2210 if you want to reference the form.