I recently completed my federal income tax return for 2022. Turns out, I owe the IRS about $2,000. I also read somewhere that the IRS assesses a penalty if you owe them over $1,000 and didn’t make quarterly payments during the tax year. Is this correct? If so, how could I possibly have known in advance that I would owe them over $1000? If it is correct, should I go ahead and pay the amount my return says I owe and then wait for them to bill me for the penalty or should I try to find out how much the penalty is and pay it along with what my return says I owe?
That happened to me in 2021. I paid the penalty (which was very minor when I filed taxes) then I had to pay quarterly taxes the following year, which is really easy to do online. If you file your taxes soon, the penalty won’t be as much as if you wait longer. Don’t panic – just do your taxes (soon!) and see. If it’s bad, then you can panic. Just kidding – just get your tax withholdings/payments better adjusted for the next tax year.
Once I got my withholdings better adjusted (my employer was not taking out enough in federal/state tax) then I went back to no quarterly payments and filing in February.
Agree
BTW, Turbotax wanted to add almost double what the IRS actually billed. Glad i overrode it.
These are the “Safe Harbor” rules that apply to those with an adjusted gross income under $150k. (They are altered slightly for higher-income taxpayers.)
The IRS will not charge you an underpayment penalty if:
- You pay at least 90% of the tax you owe for the current year, or 100% of the tax you owed for the previous tax year,
or - You owe less than $1,000 in tax after subtracting withholdings and credits
I’m retired and I don’t have any money withheld from Social Security, pension or IRA. But my income is pretty stable. I use this tool to figure my estimates - I just plug in a projected annual amount and it shows me what my tax will be. Then I divide that by 4 and send that in quarterly. I’ve used this for about 4 years and it’s very accurate.
The reason I don’t withhold is because I retired from a state agency and state pensions aren’t taxable (by the state). But if I withhold for Federal, Kansas law says I must also withhold 5% for the state. Since I’ll owe nothing, I’d rather not have the state holding 5% of my retirement.
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While living in Taipei, I had a tax lady in Cal who understood foreign tax credits. Got to know her and she had a large following of people in the arts, painters, writers, sculptors, actors, etc.
These people might go months with zero income, then wham, a large payoff. Figuring quarterly taxes were a nightmare but she knew the system and her clients rarely had penalties.
If you owe over $1000 and your income was uneven during the year (examples: big year-end bonus or took lump sum), you can file a special IRS form to show when the big jump in income and underpayment occurred and that might reduce the penalty. The form is a PITA to fill out and may not be worth doing for everyone.
How did you know how much the penalty was or did you wait for the IRS to notify you that you owed a penalty?
This happened to me when filing taxes this year. My filing status had changed from Married Filing Jointly to Single and that fact prevented me from having to pay a penalty.
IRS Form 2210 can be used to determine if a penalty is due.