If you owe $1,000 or more in tax when you file your 2005 return -- and the amount is more than 10% of your total tax bill for the year -- the IRS will assume that you also owe a penalty for failing to pay enough tax during the year via withholding or quarterly estimated tax payments. The penalty is the IRS's not-so-subtle reminder that taxes are due as income is earned, not in April of the following year.
The penalty works a lot like interest on a loan. The rate is currently 7%.
But before you pay the penalty, see if you can fit into one of the exceptions that protects you from it.
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.
- If you paid in at least 90% of your actual tax bill for 2005 (and any required estimated payments were made on time), for example, the penalty doesn't apply.
- If your payments during 2005 equaled the amount of your 2004 tax bill, forget the penalty -- no matter how much extra you owe when you file. However, as with so many tax rules, there is an exception to the neat 100%-of-last-year's-tax exception. If your 2005 adjusted gross income was more than $150,000, you had to pay in at least 110% of your 2004 tax liability to avoid the underpayment penalty.
Bottom line: Before you pay an underpayment penalty, check the rules carefully for a way around it.
And, even if you owe the penalty, don't worry about tackling the complicated Form 2210 to figure out how much you owe. The IRS will be happy to crunch the numbers for you -- you can double-check the bill when you get it. Letting the agency do that will allow you to hold on to your money for a bit longer. The interest clock stops running as soon as you pay your tax bill with your return; there's no interest charged on the penalty amount if you pay it by the date set on the bill.
-
When Should You Hand Over the Keys — to Your Investments?The secret to retirement planning? "The best time to hand over the keys is before you’ve realized you need to hand over the keys."
-
A checklist for high-net-worth individuals looking to maintain and grow their wealth.A strategic guide to managing, preserving, and expanding your wealth for long-term financial security.
-
Which Generation Pays the Most Tax in the US?Tax Burden Polls show that most people feel like taxes are unfair. But which age group bears the brunt of the tax burden in the United States?
-
Tax Day 2025: Don’t Miss These Freebies, Food Deals and DiscountsTax Day You can score some sweet deals on April 15 in some select restaurants like Burger King, Shake Shack, and more.
-
Tax Time: Does Your Kid Influencer Owe Taxes?State Tax Some minors are making big money on social media. Here’s how to know if they need to file taxes.
-
Trump Plans to Terminate IRS Direct File programTax Filing The IRS Direct File program was piloted last year in 12 states and has since expanded to 25. But will it last under the Trump administration?
-
How Caregivers for Adults Can Save on Taxes in 2025Tax Breaks Caring for your parent or spouse can be stressful, but the IRS offers tax breaks for qualifying taxpayers. Here they are.
-
U.S. Treasury to Eliminate Paper Checks: What It Means for Tax Refunds, Social SecurityTreasury President Trump signed an executive order forcing the federal government to phase out paper check disbursements by the fall.
-
IRS Layoffs Spark Delays, Doubt This Tax Season
Tax Season Tax experts say Trump’s downsizing of the IRS is already causing problems.
-
States with the Highest Income Tax Rates for RetireesState Tax You may reconsider living and retiring in one of these states due to high taxes.
