Big tax bili. Not my fault?
January 30, 2010 2:58 PM   Subscribe

I got a loan from the IRS. I used it to stimulate the economy. What is the best way to pay it back without also paying a fat under withholding penalty? You are not my tax attorney.

I just completed the rough calculation of my 2009 taxes. I owe about $1,800, due to the fact that my withholding rate was very low. The rate was low as a result of the Making Work Pay program, which reduced payroll withholding starting last April. Yes, I took the new tax credit and completed Schedule M with my return.

The IRS will be happy to calculate my estimated tax penalty. I have the option of completing Schedule 2210, and requesting a waiver of the penalty if, as the instructions say, "The underpayment was caused by adjustments to income tax withholding tables that took effect in spring 2009." And then, "Enter the amount you want waived ... next to line 17." And then, attach a statement with the reasons for the underpayment, and the IRS will decide whether to grant the waiver.

The question is, am I overthinking this? If not, how do I prove that Making Work Pay made me under withhold?
posted by Midnight Skulker to Work & Money (3 answers total) 1 user marked this as a favorite
The fundamental question is: "If the MWP program had not gone into effect, would your employer have been withholding an adequate amount? In other words, is the change in withholding responsible for the entirety of your $1,800 tax burden or at least $801 of it? If so, you can assume, in your attached statement that you would have had no penalties for underpayment. Calculate what the withholding would have been under the previous schedule and under the revised schedule to see if the result is entirely due to the revision. [You can make the argument that there would be no penalty for the first $1,000 of underpayment (assuming you qualify under the standards on pages 74 and 75 of the instructions) and that the remaining $800 was the result of the MWP program.]
posted by Old Geezer at 4:32 PM on January 30, 2010

See this IRS website. Seems to say that you are responsible for making sure your withholding is sufficient, and will owe a penalty if it is not.
posted by melissasaurus at 5:10 PM on January 30, 2010

Making Work Pay is a credit of $400 for individuals or $800 for couples. It's hard to explain why you would be $1800 short. Did your employer make a mistake in calculating withholding? Was there a major change in your income? Do you have large amounts of interest and dividends? You might want to change the number of allowances on your W-4 this year if you have significant income other than wages.

You do not have to pay a penalty if you paid at least 90% of what you owe this year or if you paid 100% as much as you paid last year or if your underpayment is less than $1000. The good news is that the penalty rate is only 4% this year. The 4% is calculated as the amount of underpayment from the 90% that you should have withheld. Also the 4% is an annual rate calculated from the amount of underpayment at each quarter. So, for example, for the last quarter you are only charged about 1%. What this all means is that in your case your penalty will probably be significantly less than 70 bucks. Since this is so small, it might be easiest to just let the IRS figure it for you. Form 2210 is an ugly calculation.
posted by JackFlash at 5:49 PM on January 30, 2010

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