DianeW777
Expert Alumni

Get your taxes done using TurboTax

It depends.  If your income is received evenly throughout the year, then annualizing may not be useful.  The IRS allows all tax withheld during the year to be considered as paid evenly throughout the year, regardless of when paid/withheld.  However, if you paid any estimated tax payments they are considered only on actual payment dates.

 

Vested stock and your bonus can both contribute to this year's penalty increase.

 

In your situation, it's quite possible to have an underpayment penalty for two reason. The amount of the underpayment penalty depends on the tax due.

  1. The withholding on your pay checks is not enough, and
  2. There was an increase in the income that does not have any withholding and estimated tax was not paid or not enough was paid to cover this income.

Annualizing your income will not be helpful if you did receive all of your income evenly.  It does help those who have a high amount of income in the last quarter of the year.

 

Penalty Reasons:

Generally, you can avoid the penalty if your total timely estimated payments and withholdings are greater than or equal to the lesser of:

  • 90% of the total tax after credits for the current year, or
  • 100% of the total tax after credits in the prior year
  • See one exception below.

You can also avoid the penalty if the amount you owe is less than $1,000 as long as any estimated tax payments you made are timely.

 

Note: High-income taxpayers. If your adjusted gross income (line 11 of your 2023 Form 1040) is greater than $150,000 (or $75,000 if you're married and file a separate return from your spouse), you can avoid a penalty by paying at least 110% of your total tax from the prior year.

 

@js409 

[Edited: 03/25/2023 | 6:48 AM PST]

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