Underpayment Of Tax Penalty

[gman]

Taxpayer has never paid in estimates, but owes a large sum this year due to TXU stock buy out. Taxpayer owes several thousand. Would there be any underpayment penalty or interest due since there were no prior tax liability., thus no estimate requirement?

[Koss]

Prior year

On the 2006 return, was there no tax liability, or no balance due?

And when during the year did the client get the big chunk of money?

These two variables can make a big difference...

[gman]

No Balance Due

and the payment came in Oct. Lets say they paid in 110% of prior year tax. Would there still be a penalty?

[Y2KEA]

Do the 2210 & find out.

[Gary]

Regular method

When you do the 2210, do the regular method. You probably can reduce the penalty. Depending upon the state you live in, you might have to do the same on the state return.

[myerstaxes]

I have a TXU buy out client too

and she came to me in December for me to calculate an estimate, and I did and she paid it in January...She also got her monies in October, I was able to get rid of the penalty since 1) she paid the estimate in the quarter that she received the increase in income and 2) she had zero tax liability last year...As was said, try putting the facts of 2006 in the 2210 program, and see what happens...

[Snaggletooth]

Annualize the 2210

There is an option on Form 2210 to report your estimated tax liability for each quarter[1] of the year, and measure your payments. Since this occurred in October, you may calculate a lower penalty (maybe even NO penalty) if you use the annualization method.

It's not easy. Your software will most likely handle the intricate calculations. I used to have to do this by hand in the "old days."

[1] "Quarter" in this sense is used loosely. If you go through the meat-grinder on this method you will discover that these are not perfectly timed quarters, but irregular.

[Gretel]

Am I wrong again? I thought as long as you don't have any tax liability the year before you never will have any underpayment penalty no matter how much and when you received income this year.

[Bees Knees]

Am I wrong again? I thought as long as you don't have any tax liability the year before you never will have any underpayment penalty no matter how much and when you received income this year.

After clarifying, the original poster said there was no balance due. No balance due is not the same as no tax liability.

[Gretel]

Dong! Dong! Sure it is. One of these days I get myself in big trouble for not listening will enough.