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A penalty will apply if a taxpayer fails to make sufficient estimated tax payments during the year. The appropriate combination of quarterly estimated tax payments ans withholdings can enable the taxpayer to avoid this penalty. Proper tax payments may help you minimize the required estimated tax payments and avoid the underpayment penalty.
AVOIDING THE PENALTY
You will not owe the penalty for the underpayment of estimated taxes if the amount of taxes you pay is the lesser of 90% of the actual tax shown on your current year's tax return or 110% of the tax on your prior year's based on a safe harbor exception ( 100% if the AGI on your prior year's return was $150,000 or less or $75,000 if married filing separate) or 90% of your actual tax for the current year base on the annualized income installment method
The penalty is determined on a quarterly basis combining the withholding tax and timely paid quarterly estimated taxes. You may still owe the penalty for an earlier due date shortage even if you pay the tax in later quarters to make up the underpayment. It may be possible to avoid this situation by using the annualized income installment method. Alternatively, you may increase withholding taxes to be applied evenly throughout the year.
ANNUALIZED INCOME INSTALLMENT METHOD
The annualized income installment method is a pay-as-you-go method to calculate the required quarterly estimated tax payments You may receive income, such as business income, bonuses and capital gains, unevenly through out the year. If you expect to earn more income in the latter part of 2015 than in the first months of the year, or pay deductible expenses earlier in the year, you can reduce your estimated tax payments by paying the tax based on actual quarterly tax projections. This method provides a way to pay less estimated tax than the safe harbor method based on 110% of your actual prior year tax for the quarter with lower income.
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