W-4 Underpayment Penalties

[brian-cropp]

I'm trying to withhold as little as possible so that I take home as much as possible.  I have a stay-at-home wife and four dependent kids.  Based on what I understand, I'm withholding enough to pay my taxes each year but not enough each quarter, so I incur an underpayment penalty when I file in February. How do I calculate what I should be paying each quarter to avoid the penalty?

[AmyATX · Accepted solution]

Thanks for the question, Brian.

TurboTax will, by default, calculate estimated tax payments based on your current year.  These estimated tax payments are based on using the "prior year exception" and will prevent you owing under payment penalties.  If your income is going up, and you do not want to calculate individual quarterly estimates this may be your best option to maximize your cash flow as well as avoid the underpayment penalty.

To note:  You will also need to make sure your withholding is at least as much as the prior year return for this to keep you out of the underpayment penalty.

Here are the IRS underpayment penalty "safe harbors"

Less than $1,000 is owed on 4/15

100% of prior year taxes paid (may be higher for higher incomes)

90% of current year taxes

You can make these payments either through withholding or through (equally paid) quarterly estimated tax payments.

TIP:  You can adjust your W-4 withholding at any time which may help you reduce or even eliminate underpayment penalties.

Thanks for the question, Brian!