Discussion:Tax liability penalty
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Discussion Forum Index --> Tax Questions --> Tax liability penalty
| 6 February 2006 | |
| I understand in general, if an individual owes more than $1000 when return if filed, she could be penalized for not sending in enough ES amount. This is in regards to Safe Harbour Rules, if a taxpayer had paid 110% of last year's tax liability amount (which is Line 62-Total Tax, after all credits) I assume she would NOT be penalized even if she owes $75,000 of taxes, correct? (This is due to unexpected outstanding profits from S-Corp.) Would someone please help. Thanks in advance. | |
DR BRISKET (talk|edits) said: | 6 February 2006 |
| If a taxpayer's AGI is more than $150,000, 90% of the current year tax or 110% of the previous year's tax must be paid in to avoid an underpayment penalty. Otherwise, if withholding and estimated taxes paid are greater than the previous year's total liabilty, no penalty is assessed.
If your client's AGI is greater than $150K, you might look at the annualization method of computing estimated taxes, particularly if the S-Corp income fluctuated throughout the year. | |
DR BRISKET (talk|edits) said: | 6 February 2006 |
| Correction--I meant to say "you might look at the annualization method of computing the UNDERPAYMENT PENALTY if the S-Corp income fluctuated through the year. | |
| 7 February 2006 | |
| Thanks, Dr Brisket, for your response. I notice you've answered many questions on the forums. We could always use your expertise!
One final note - all the above met. Client has paid 150% of previous year's tax liability amount, and still will owe about $75,000 this year. Am I correct that she will NOT owe any penalty? Thanks again for your help. | |
DR BRISKET (talk|edits) said: | 7 February 2006 |
| Applying the 110% rule, you are correct there will be no estimated tax liability, assuming the estimated taxes paid during 2005 were done so on a timely basis. Withholdings shown on a W-2 form are applied evenly against the four estimated payment dates. Actual estimated payments are applied as they are made. Thus, if a taxpayer waits until 1/17/06 to make any estimated payments for 2005, he would be subject to an underpayment penalty for not making his first three estimated payments, even if he otherwise met the 110% or 90% rule. The exception to this would be if it can be shown the taxpayer's income fluctuated throughout the year. If this happens, underpayment penalties can be considerably reduced by applying the annualization rules. | |
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