27.1 Do You Owe an Estimated Tax Penalty for 2012?
When you have computed the exact amount of your 2012 tax liability on your 2012 return, you can determine whether you are subject to an estimated tax penalty. If you owe less than $1,000 on your 2012 return after taking into account withheld taxes, you are not subject to a penalty. If the tax owed after withholdings is $1,000 or more, you can now determine whether your 2012 withholdings plus estimated tax installments were at least 90% (66 2/3 % for farmers and fishermen) of your 2012 total tax.
Total tax here means not only your 2012 regular income tax and alternative minimum tax (AMT) liability after credits, but also other taxes such as self-employment tax, household employment taxes, penalty taxes (such as penalties on early retirement plan distributions and on distributions from qualified tuition programs not used for education), and taxes from recaptured credits. If you met the 90% test, you are not subject to an estimated tax penalty for 2012.
Even if the 90% test was not met, you may be able to avoid a penalty if your 2012 withholdings and estimated tax installments were at least 100% of the total tax (see above) shown on your 2011 return. This exception requires that the 2011 return covered all 12 months. However, if your 2011 adjusted gross income exceeded $150,000 ($75,000 if you are married filing separately for 2012), your withholdings plus estimated tax installments for 2012 had to be at least 110% of your 2011 total tax (not 100%) to qualify for this prior-year liability exception.
Note that to completely avoid a penalty for 2012 under either the 90% current year exception or the 100%/110% prior-year exception, you must have paid at least 25% of the amount required under the applicable exception by each of the four payment dates. The penalty is figured separately for each payment period; see below.
Even if you owe $1,000 or more (after withholdings) on your 2012 return and you do not qualify for either the 90% current-year exception, or the 100%/110% prior-year exception, you are not subject to an estimated tax penalty for 2012 if you did not have to file a 2011 return or your 2011 total tax was zero. This exception applies only if you were a U.S. citizen or resident for all of 2011 and your 2011 tax year included 12 full months.
If you underestimated your 2012 liability because of an unexpected increase in income during 2012, or if you did not earn income evenly throughout 2012, such as where you operated a seasonal business, you may be able to lower or eliminate the penalty by using the annualized income installment method. Under this exception, your required installment for one or more payment periods could be reduced below 25% of the required annual payment by figuring the installment that would be due if the income (and deductions) earned before the date for the installment were annualized. The computation is quite complicated; see the Form 2210 instructions and the worksheets in IRS Publication 505 for the details of applying the annualized income exception.
Penalties are figured separately for each payment period.
Separate penalty determinations must be made for each of the four 2012 estimated tax payment periods, as of the applicable installment dates: April 17, June 15, and September 17 in 2012, and January 15, 2013. This means that if, after taking into account withholdings from your pay, you underpaid an installment, you may owe a penalty for that period even though you overpaid later installments to make up the difference. However, withholdings towards the end of the year can eliminate an underpayment for an earlier period. In applying withholdings, the total withholdings of the year are divided equally between each installment period unless you elect on Form 2210 to apply them to the periods in which they were actually withheld. An overpayment for a period carries over to the next period.
The penalty for each period, which is based on the prevailing IRS interest rate for deficiencies (46.7), runs from the installment due date until the amount is paid or until the regular filing date for the final tax return, whichever is earlier.
Planning Reminder
Figure the 2012 penalty for yourself on Form 2210 or let the IRS do it.
In most cases you do not have to file Form 2210 to figure any estimated tax penalty for 2012; the IRS prefers to figure it and send you a bill if a penalty is due.
However, you must figure your penalty and file Form 2210 if (1) you request a partial waiver of your penalty (see below for waiver rules), (2) you use the annualized income method (Schedule AI of Form 2210) to reduce or eliminate your penalty, or (3) you elect to treat your withholdings as paid on the dates withheld rather than in equal amounts on the four installment dates.
In the following situations, the IRS requires you to file only page 1 of Form 2210 but not the rest of the form (Parts III and IV) on which the penalty computation is made: (1) you request a waiver for your entire penalty, or (2) you filed a joint return for either 2011 or 2012 (not both) and your required annual payment for 2012 was based on the 100% or 110% prior-year safe harbor. If you are requesting a waiver, attach a statement to page 1 of Form 2210 that explains the grounds for the request (see the waiver rules below). For situation (2), you must file only page 1 (Parts I and II) of Form 2210 and are not required to figure your penalty, but you may use Part III or Part IV of Form 2210 as a worksheet to figure the penalty and enter it on your return.
If you use Part IV to figure the penalty under the regular method, an underpayment for any payment period reduces the payments made in the following period. That is, an underpayment of one period is carried over to succeeding periods on Form 2210. If you underpay for a period, any payment you make after that installment date will be applied first to the earlier underpayment. Thus, even if you make the required payment for a period, you could still be subject to a penalty for that period because your payment is applied to a prior underpayment.
If you overpaid for any period, the excess carries over to the next period. The excess cannot be used to make up for an underpayment of the prior period if the payments were made electronically, with Form 1040-ES vouchers or by credit card. However, withholdings are allocated equally over the year so that withholdings late in the year can reduce an underpayment for an earlier payment period.
Waiver of penalty for hardship, retirement, or disability.
The IRS may waive the penalty if you can show you failed to pay the estimated tax because of casualty, disaster, or other unusual circumstances.
The IRS may also waive a penalty for a 2012 underpayment if in 2011 or 2012 you retired after reaching age 62 or became disabled, and you failed to make a payment due to reasonable cause and not due to willful neglect.
To apply for the waiver, attach an explanation to Form 2210 that documents the circumstances supporting your waiver request. For a waiver due to retirement or disability, show your retirement date and age or disability date. If an underpayment was due to a federally declared disaster, you do not have to request a waiver on Form 2210 because the IRS allows an automatic postponement following such a disaster. When you file your return, the IRS should identify your residence as being in a federally declared disaster area and if you still owe a penalty following the end of the disaster waiver period, the IRS will send you a bill. If you are requesting a waiver due to a disaster other than a federally declared disaster, other casualty, or unusual circumstance, attach documentation of the event, including police and insurance company reports, and an explanation as to how it prevented you from making estimated tax payments.
Farmers and fishermen.
Farmers or fishermen who earned at least 2/3 of their 2011 or 2012 gross income from farming or fishing can use Form 2210-F to determine whether they owe an estimated penalty for 2012, but generally the form does not have to be filed because the IRS will figure any penalty; see the Form 2210-F instructions.