John Bullis: Avoid the penalty for underpayment of estimated tax

If your individual income tax return ends up with a balance to pay of more than $1,000, you may incur a small penalty for underpayment of estimated tax.

Form 2210 is used to compute the penalty, and it is a fun form with many special rules.

The penalty is not only about estimated tax. If you have tax withheld from wages, retirement, social security benefits, etc., and you owe more than $1,000 with your return, you may incur the penalty.

The most common exception to having the penalty apply is to have paid — by tax withholding or estimated tax payments — in 2014 as your total tax was in 2013. However, even that has a special rule. If your adjusted gross income is more than $150,000, you avoid the penalty if you paid in 110 percent of 2013 tax.

Some folks have enjoyed a big increase in income. It could be an inherited annuity they cashed in, sales of capital assets, etc. In that instance, there is a special provision that allows them to figure the penalty by quarter. It is called the annualized method. The form asks for each time quarter how much income was received and how much was paid in for that quarter.

The penalty applies on a quarterly basis for payments of estimated tax. But tax withheld is treated as if it was withheld 1/12 each month, even if it all happened in the last part of the year. So, withholding can be better than estimated tax payments for avoiding or reducing this penalty.

Some folks have found by increasing their withholding from various sources, they have less to worry about and it is easier bookkeeping.

The payment schedule for estimated tax is called quarterly, but it really isn’t. The first payment is due April 15. The second payment is due two months later on June 15. The third “quarterly” payment is due three months later on Sept. 15. The fourth and last payment is due four months later on Jan. 15 of the following year.

California individual returns have a similar penalty, and it usually is bigger than the IRS penalty. Each state is different, but it is great Nevada does not have an individual income tax.

Some folks have found the penalty for underpayment of estimated tax is cheaper than borrowing the money owed.

Did you hear? “If we are facing in the right direction, all we have to do is keep on walking,” a Buddhist Proverb.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.