Can someone clarify underpayment penalty for me?

Question

I think I will have an underpayment penalty this year unless I do something, but was wondering if someone can clarify some points for me. Here is my situation:

- Filing married jointly

- My AGI (line 37) last year was less than 150K.

- Our total withheld last year was $18,604, but total tax (line 63) was $22,431 since we also had some self-employed income that I did not pay any tax on durng the year, so owed some tax at the end of the year

- I cashed in a large amount of US savings bonds this year, with about $60,000 in interest paid to me for them

- So, this year my AGI will be over 150K since it includes the 60K of interest, and my tax will be a lot higher than last year since this is an extra 60K that I didnt have last year

- If my wife and I keep withholding as it is now, we will not match last years total tax, probably be a few thousand under, about $20,000

So, from what I understand, since i was under 150K last year, I have to have paid at least my total tax by the end of this year for me to avoid the penalty, but since I will not have witheld 22,431 by the end of the year I will owe some penalty.

- Is this correct? Will I owe a penalty? Did I miss anything? Do you need more info from me?

- How can I avoid this? Do I have to adjust withholding? or can I simply send a check to the IRS to make sure I reach

22,431 by the end of the year?

- If I dont do anything, what would my penalty be? How is it calculated by the IRS? Thanks in advance for all of your help, Art

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Art · Accepted Answer

Thanks guys for your help. So, I seem to be getting conflicting answers as to whether I can send a check to the IRS now or not instead of increasing my withholding. So, can I send a check to the IRS now even if I havent made any payments until now? If so, what form would I use? Also, do states have an underpayment penalty to? specfically NY state? Thanks again Art

DF2 · Answer

I suspect that others have pointed out that withholding is treated as if you had paid it evenly thru the year. Estimated tax payments are not; they are treated as paid when you pay them.

I don't know about NY, but I know state penalties can be much worse than federal. The federal "penalties" may be less than what you would pay to borrow from a bank. State penalties may exceed what it would take to borrow from a credit card.

Dennis Ritchie · Answer

....States can also be irritating various ways.  Last year Iunderestimated both NJ and Federal taxes by quite a bit, andsent fairly large checks by Apr 15.  A few weeks ago I got acertified letter from NJ, wanting $45 in interest/penaltyfor underpayment of estimated tax. The "certified" partmeant a trip to the post office. The letter also said that the $45 had to be paid bycertified or cashier's check.  So another trip, this time tothe bank. The bank clerk seemed a little fuddled and said"do you want to do this? It will cost $15."  I said thatthat is what the state demands.  She talked to her boss andas a special favor, said they wouldn't charge me this time. PITA.  If they had just sent a simple notification that Iowed $45 I would have saved 2 trips (though lost a story). Dennis

Can someone clarify underpayment penalty for me?

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