If your tax bill is larger than expected, you may be in for another unpleasant surprise: an underpayment penalty. Taxpayers who owe Uncle Sam $1,000 or more are potentially subject to the penalty. But there are a few ways to avoid this double whammy.
80% waiver
For this tax season only, taxpayers who paid in at least 80% of their 2018 tax bill can escape the underpayment penalty, the IRS announced in late March. Normally, taxpayers must pay at least 90% of the current-year tax bill to avoid the penalty.
This new, additional relief comes after the IRS dropped the threshold to 85% in mid January. An accountants’ association and Congress pressured the IRS to issue that waiver, and both have been advocating for more relief, says Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. (Before the drop to 80% was announced, the IRS had gone a step further for farmers and fishermen: They are now off the hook for underpayment penalties for 2018 if they file and pay tax due by April 15.)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The IRS granted the relief “in recognition of complexity for the 2018 tax year,” realizing that many people didn’t fully understand how the law changes might affect their bills, says Eric Bronnenkant, the head of tax for Betterment for Business.
To get the waiver, you need to file IRS Form 2210, says Gil Charney, director of the Tax Institute at H&R Block. The instructions for that form have a worksheet to determine eligibility for the waiver.
Taxpayers who already filed their returns but qualify for the expanded relief can claim a refund of the penalty by filing IRS Form 843, the IRS says. On the form, the IRS says include the statement “80% waiver of estimated tax penalty” on Line 7.
If you don’t qualify for the 80% relief (or another escape route), then the penalty is calculated based on the regular 90% threshold. If you paid 81% of your tab, for instance, there’s no underpayment penalty; if you paid 79%, you get penalized under the normal rules.
Prior-year tab
If you don’t qualify for the 80% waiver, the next step is to look back at your tax return filed last year. Was your total 2017 tax bill less than or equal to the total tax you paid for 2018, including withholding and estimated tax payments? If you paid at least 100% of the prior year’s tax tab for 2018 (or 110% if your adjusted gross income is $150,000 or more), mark yourself safe from the underpayment penalty for 2018.
Meet the appropriate threshold, and there’s “no penalty at all,” says Charney. It’s a “get out of jail card.”
Installment method
No luck so far with qualifying for relief? Sharpen your pencil. The U.S. tax system is “pay as you go”—that is, you are expected to pay tax on your earnings as the money comes in. But if your earnings and other taxable income came in unevenly over the year, the annualized income installment method might reduce or wipe away the underpayment penalty.
With this method, you calculate your tax tab for each quarter. So if an income spike in the fourth quarter caused you to underpay tax, using the installment method limits the underpayment penalty to that quarter. “It’s fairly complicated. It’s basically like doing your taxes four times,” says Luscombe, but it’s useful for those who can contend that more of their income came late in the year. For more details, read IRS Publication 505, Tax Withholding and Estimated Tax.
Ask forgiveness
If you haven’t yet filed your return, do so by April 15 to avoid a failure-to-file penalty. If you can’t pay the full tax bill, figure out a payment plan. Go to www.irs.gov/payments for options.
If you fail to file on time or are penalized for not paying the amount shown due when you file, you can ask Uncle Sam to cut you a break. The IRS can waive penalties for first-time offenders, says Luscombe, but “you have to request it.”
To qualify for “first-time abatement,” you must have no tax penalties for the previous three tax years, all required returns filed, and have paid—or arranged to pay—any tax due. “Essentially, you have to have a clear record,” Charney says. Find more details at IRS.gov.
After filing your 2018 return, check up on your projected tax tab for 2019. The withholding calculator at IRS.gov can help you figure out how much tax to withhold from paychecks or retirement income sources, or how much you should pay in estimated tax. Consider paying 100% (or 110% for higher-income taxpayers) of your 2018 tax tab in 2019 to avoid a surprise when filing your taxes next year.
-
Dealmaking Drives HEICO Stock's 100,000% ReturnHEICO has been skillful with mergers and acquisitions over the years and this has resulted in a 100,000% share-price return.
-
Caregiving Is a Stealth Retirement Expense for Women: I Should KnowEldercare takes a toll on everyone, but women's careers tend to suffer more — with dire consequences over the long term.
-
Five Scary Things the IRS Can Do If You Owe Back TaxesTax Law Traveling in 2025? The IRS can take your passport (and house) if you don’t pay your tax bill.
-
Early Tax Refund Options Could Trap Your CashTax Refunds Don’t be fooled into thinking you’re not getting a loan — because you really are.
-
First-Time Filing Taxes? Key Tax Tips to Know for 2025Tax Filing Preparing your IRS taxes for the first time may seem daunting, but here are some return preparation and filing tips to start.
-
Legislation Cracking Down on IRS Tax Refund Mail Theft AdvancesIRS A string of bipartisan measures targeting taxpayer refunds, rights, and protections move forward on Capitol Hill.
-
Ten IRS Audit Red Flags for Retirees in 2025Retirement Taxes Retirees who think they can escape the IRS audit machine should think again.
-
Could ERC Delays Get Worse if Trump Downsizes the IRS?IRS The Trump administration’s push to shave down the IRS can impact taxpayers like you.
-
IRS Income Tax Refund Schedule 2025: When Will Your Refund Arrive?Tax Refunds Your 2025 IRS tax refund may arrive sooner than you think. Here’s a schedule for when you can expect your check or direct deposit.
-
IRS Tax Refunds Are $1,000 Smaller This Year: Here's WhyTax Refunds Inflation-related changes to the tax code could result in a larger refund for some, but you’ll have to wait.
