It’s my annual “Taxes from A to Z” series! Next up:
If you owe tax on Tax Day, it may not simply be enough to write a check for the tax due. Depending on how much tax you owe – and the circumstances – you may also have to pay a penalty.
Most commonly, a shortfall in taxes paid is tied to failure to make estimated payments. It can, however, also happen if you didn’t have enough withholding during the year (to keep that from happening in the future, make sure that you revise your form W-4, Employee’s Withholding Allowance Certificate, which downloads as a pdf).
There are, however, some exceptions to the rule that you will be subject to a penalty if you have a shortfall in taxes paid. Those are:
- If the total of your withholding and estimated tax payments for 2014 was at least as much as your 2013 tax (or 110% of your 2013 tax if your AGI was more than $150,000, $75,000 if your 2014 filing status is married filing separately) and you paid all required estimated tax payments on time, you fall into the safe harbor and would not be subject to a penalty.
- If the tax due on your 2014 return is no more than 10% of your total 2014 tax, and you paid all required estimated tax payments on time, you fall into the safe harbor and would not be subject to a penalty.
- If your total 2014 tax less your withholding and refundable credits is $1,000 or less, you would not be subject to a penalty.
- If you did not have a tax liability for the entire 2013 tax year, you would not be subject to a penalty.
- If you did not have any withholding taxes and your current year tax less any household employment taxes (for household employees) is less than $1,000, you would not be subject to a penalty.
If you find that you are subject to an underpayment penalty and need help avoiding the same result next year, consult with your tax professional.
