I'm debating buying a Bolt EV. I know that the tax credit has expired for GM, but I'm hearing that there's a good chance that Biden will reinstate the tax credit. So I'm wondering if I can change my withholdings just in case the tax credit is passed to I owe a sufficient tax bill. I've heard there can be an underpayment penalty, but I'm wondering how much that is. Does any one have any thoughts?
The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. You can do this either through withholding or making estimated tax payments.
In order to not be be charge an underpayment penalty you must:
- Prepay 100% of the previous year's tax return or
- 90% of the tax on the current year's return or
- Owe less than $1,000.
The penalty for late payment is generally 0.5 percent of taxpayers’ unpaid taxes per month. It can build up to as much as 25 percent of their unpaid taxes.
You can request a waiver of this penalty from the IRS if you have not requested a penalty waiver in the last 3 years.
HERE for more information on this waiver program from the IRS
If you change your withholdings and the program does not get reinstated, you could owe a large tax amount at the end of the year. My suggestion would be to not change your withholding until the reinstatement of the EV credit then review your tax situation at that time. It much better getting a larger refund than owing a large amount at the end of the year.
Ok, thank you for your reply. This is good information.
What I was thinking I could do is just set up a savings account and put the extra money I'm getting from changing my withholdings in that account. Then when tax time comes around I'd either pay my tax bill out of that account or I'd be able to keep it if the program is reinstated.
So does that mean I can claim the waiver once every three years? Does TurboTax file this waiver for me?
No the program doesn't do a waiver ... once the IRS bills you for the penalty you must beg for a waiver which may or may not be allowed especially if you have done this more than once without a valid excuse.
Purposely under withholding is not a good strategy especially at todays savings account interest rates.