How do I avoid a penalty for under withholding?

May, 28 2014 by Dave Du Val, EA

Hey Dave,

I hate allowing the government an interest free loan so I have always put my money into a savings account and then pay my tax when I file my tax return. But this year I had a penalty for owing too much at the end of the year. So my question is: how much do I have to allow them to take throughout the year in order to avoid that penalty?

Shirley

 

Hi Shirley,

First, I salute your approach to paying your taxes while not giving an interest-free loan to the government, but it appears you may have gone too far the other way! The “perfect” result on the tax return’s bottom line is to owe and be owed zero.

The requirement for the safe harbor method for 2013 (no changes yet for 2014) is to have paid in 90% of the tax shown on the 2013 return, or 100% of the tax shown on the 2012 return (caveat: it is 110% if your adjusted gross income was over $150,000 [$75,000 for married filing separate]). Generally, the underpayment penalty does not apply if your tax due is less than $1,000, or if you had no tax liability on your 2012 return.

To make changes to your withholding you would need to file a new Form W-4 with your company’s human resources or payroll department. You may wish to use the TurboTax W-4 planning tool to assist you in claiming the proper number of exemptions on Form W-4 before filing it with your employer(s); this should help you avoid penalties provided you include all expected income.

Deductibly Yours,

Dave