Tax Resources
 

Estimated Tax Penalty

If you have not made the appropriate estimated tax payments and you are required by the IRS to, then you may owe the IRS estimated tax penalty. The IRS has penalty for underpayment of estimated tax. So, who has to pay estimated tax penalty and when will he or she has to pay it?

When will the IRS assess estimated tax penalty?

If a taxpayer did not pay enough tax throughout the year either by:

  • tax withholding through employers or
  • making estimated tax payments

then there will be an estimated tax penalty for underpayment of estimated tax.

What is the estimated tax penalty?

A taxpayer can figure out his or her own estimated tax penalty or have the IRS figure out the estimated tax penalty for him or her.

What is the estimated tax penalty rate?

The estimated tax penalty rate for the penalty of estimated tax underpayment for 2006 is figured at an annual rate of 7% for the number of days the estimated tax underpayment remained unpaid from April 16, 2006, through June 30, 2006, and 8% from July 1, 2006, through April 15, 2007.

How to avoid paying estimated tax penalty?

If you already missed your estimated tax payments and you are required to make estimated tax payments, then you will have to pay the estimated tax penalty to the IRS. However, if you fall under the following categories, then you may not be liable to pay the estimated tax penalty or even estimated tax payments.

  • the total of your withholding and estimated tax payments was at least as much as the previous year's withholding and you paid all your estimated tax payments on time
    • 100% of previous years tax withholding if your income was $150,000 or less, or
    • 110% of previous years tax withholding if your income was more than $150,000 ($75,000 if married filing separately)
  • the tax balance due on your return is no more than 10% of your total tax and you paid all the required estimated tax payments on time
  • your total tax less withholding is less than $1,000
  • you did not have tax liability for the previous year

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