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Uncover that penalty: Filing IRS Form 2210

September 8, 2023 By Israel Padilla

How to File IRS Form 2210 for Underpayment of Estimated Tax

Hello, welcome to Bottomline Tax! If you’re an individual, estate, or trust that paid less than 90% of your tax liability through withholding or estimated tax payments, you may owe a penalty for underpaying your estimated tax. The penalty is calculated based on the difference between your required annual payment and your actual payments, as well as the number of days you were underpaid. However, there are some exceptions and special rules that may reduce or eliminate your penalty.

In this blog post, we’ll explain what IRS Form 2210 is, who needs to file it, how to fill it out, and how to avoid the penalty in the future. We’ll also provide some data from 2022 and 2023 to help you estimate your tax liability and payments. Let’s get started!

Table of Contents

What is Form 2210?

Form 2210 is a tax form that you use to see if you owe a penalty for underpaying your estimated tax and to figure out the amount of the penalty if you do owe one. The form itself does not calculate the penalty, but it provides the necessary information and instructions for you to calculate the penalty yourself. Estimated tax is the method used to pay tax on income that is not subject to withholding, such as self-employment income, interest, dividends, alimony, rent, etc. You can also use estimated tax to pay other taxes, such as the Additional Medicare Tax, the Net Investment Income Tax, or the Qualified Business Income Deduction.

You’re required to pay estimated tax if you expect to owe at least $1,000 in tax after subtracting your withholding and refundable credits. You can pay estimated tax in four equal installments throughout the year: April 15, June 15, September 15, and January 15 of the following year. If any of these dates falls on a weekend or a legal holiday, the payment is due on the next business day.

If you don’t pay enough estimated tax by each due date, you may be subject to a penalty for underpaying your estimated tax. The penalty is computed separately for each installment, so you may owe a penalty for an earlier payment even if you paid enough later. The penalty is based on the interest rate charged by the IRS on unpaid tax.

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Who needs to file Form 2210?

The good news is that you don’t have to file Form 2210 in most cases. The IRS will figure out your penalty for you and send you a bill if you owe any amount. However, there are some situations where you must file Form 2210 or you may want to file it voluntarily. Here are some examples:

  • You request a waiver of the penalty due to reasonable cause, such as casualty, disaster, or other unusual circumstances.
  • You use the annualized income installment method to figure your estimated tax payments. This method may benefit you if your income varied during the year.
  • You use the regular installment method to figure out your penalty. This method may reduce your penalty if you had large changes in your income or deductions during the year.
  • You’re a farmer or fisherman who paid all of your estimated tax by January 15 of the following year or filed your tax return and paid all of your tax by March 1 of the following year.
  • You’re a higher income taxpayer who must pay more than 90% of your current year’s tax or 110% of your prior year’s tax to avoid the penalty.

These are general guidelines, so in case you have further questions the best thing to do is to contact a tax professional about your unique situation.

How to fill out Form 2210

Form 2210 consists of four parts: Part I (Required Annual Payment), Part II (Reasons for Filing), Part III (Short Method), and Part IV (Regular Method). You can find the form and its instructions on the IRS website: https://www.irs.gov/instructions/i2210.

Here are the basic steps to fill out Form 2210:

  1. Complete Part I to determine your required annual payment. This is the amount of tax that you must pay through withholding or estimated tax payments to avoid the penalty. It’s generally 90% of your current year’s tax or 100% of your prior year’s tax, whichever is smaller. However, if your adjusted gross income in the prior year was more than $150,000 ($75,000 if married filing separately), you must use 110% of your prior year tax instead of 100%.
  2. Complete Part II to indicate the reason(s) for filing Form 2210. Check the box(es) that apply to your situation, such as requesting a waiver, using the annualized income installment method, or being a farmer or fisherman.
  3. Complete Part III (Short Method) if none of the boxes in Part II apply to you, or if you only checked box A or B. This is a simplified way to figure out your penalty based on your total underpayment for the year.
  4. Complete Part IV (Regular Method) if you checked box C or D in Part II, or if you want to figure out your penalty for each payment period. This is a more accurate way to figure out your penalty based on your income and deductions for each payment period.
  5. Enter the amount of your penalty on your tax return. For example, if you’re filing Form 1040, enter it on line 24.
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How to avoid the penalty

The best way to avoid the penalty for underpaying your estimated tax is to pay enough tax throughout the year. Here are some tips to help you do that:

  • Use the Tax Withholding Estimator on the IRS website (https://www.irs.gov/W4App) to check your withholding and adjust it if necessary. You can use Form W-4 to change your withholding from your wages or retirement income.
  • Use Form 1040-ES to estimate your tax liability and your required estimated tax payments. You can also use the worksheet in the instructions for Form 2210.
  • Make your estimated tax payments on time and in full. You can pay online, by phone, by mail, or in person. You can also enroll in the Electronic Federal Tax Payment System (EFTPS) to schedule your payments in advance.
  • Keep track of your income and expenses throughout the year and adjust your payments accordingly. You may need to pay more or less estimated tax depending on your situation.
  • Review your tax situation at least once a year and make any necessary changes. You may qualify for credits or deductions that reduce your tax liability or increase your refund.

These are general guidelines, so in case you have further questions the best thing to do is to contact a tax professional about your unique situation.

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Conclusion

Paying estimated tax is an important part of meeting your tax obligations. If you underpay your estimated tax, you may face a penalty that adds to your tax bill. However, by following the rules and guidelines explained in this blog post, you can avoid or minimize the penalty and save money and hassle.