Penalty for under payment of estimated tax

The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you do not pay your tax through withholding, or do not pay enough tax that way, you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. How much you owe or have refunded is the difference between your tax less credits you qualify for and what you have pre-paid through estimates and withholding. A lot many taxpayers end up paying more than their tax because they got caught by the Underpayment of Estimated Tax Penalty.

Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen, people who have household employees and higher income tax payers.

Generally, the payments should be made in four equal amounts to avoid a penalty. However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. The penalty may be waived if:

The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or

You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

You can also get hit with the penalty if you are getting a refund. Let’s say you had a large gambling winning in February but you held off making an estimate payment until the next quarter. Depending on the amount of the winnings and the size of the payment, you could still have to pay the underpayment penalty even if you’re getting a refund.

To avoid paying the Underpayment penalty, you want to make estimates or make sure your withholdings are enough to prevent the penalty. Your tax is your tax but there’s no need to pay more when it’s not hard to pre-pay enough to cover it.

Into farming? Some key tax tips from IRS

You are in the business of farming if you cultivate, operate or manage a farm for profit, either as an owner or a tenant. A farm includes livestock, dairy, poultry, fish, fruit and truck farms. It also includes plantations, ranches, ranges and orchards.

The IRS has 10 key points for farmers regarding federal income taxes.

1.                              Crop insurance proceeds You must include in income any crop insurance proceeds you receive as the result of crop damage. You generally include them in the year you receive them.

2.                              Sales caused by weather-related condition If you sell more livestock, including poultry, than you normally would in a year because of weather-related conditions, you may be able to postpone until the next year the reporting of the gain from selling the additional animals.

3.                              Farm income averaging You may be able to average all or some of your current year’s farm income by allocating it to the three prior years. This may lower your current year tax if your current year income from farming is high, and your taxable income from one or more of the three prior years was low. This method does not change your prior year tax, it only uses the prior year information to determine your current year tax.

4.                              Deductible farm expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. An ordinary expense is an expense that is common and accepted in the farming business. A necessary expense is one that is appropriate for the business

5.                              Employees and hired help You can deduct reasonable wages paid for labor hired to perform your farming operations. This includes full-time and part-time workers. You must withhold Social Security, Medicare and income taxes for employees.

6.                              Items purchased for resale You may be able to deduct, in the year of the sale, the cost of items purchased for resale, including livestock and the freight charges for transporting livestock to the farm.

7.                              Net operating losses If your deductible expenses from operating your farm are more than your other income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.

8.                              Repayment of loans You cannot deduct the repayment of a loan if the loan proceeds are used for personal expenses. However, if you use the proceeds of the loan for your farming business, you can deduct the interest that you pay on the loan.

9.                              Fuel and road use You may be eligible to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes.