Getting ready to file my 2021 Federal Tax Return (US) and we owe >$5k, which is primarily due to a significant amount of 1099-INT interest income from savings bonds I cashed in Dec-2021 (no tax was withheld at the time).
FreeTaxUSA is telling me I may owe $37 of Underpayment Penalty - not a huge deal but I'd just like to understand how the calculation works.
Per the IRS (
https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes):
"If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller."My numbers are as follows:
2021 Federal Tax Withheld: $19.4k
2021 Federal Tax: $24.8k
Amount Owed: $5.4k
2020 Federal Tax: $20.4k
As I read that, the penalty will only be assessed on the $1.0k difference between the $20.4k tax from 2020 and the $19.4k withheld during 2021.
Is that an accurate understanding?The software is also asking me a couple questions that may help limit/eliminate the penalty:
1. Do you want to figure your penalty using the annualized income installment method because your income varied during the year? (This is most beneficial if you had more income during the end of the year)
2. Do you want to treat your federal income tax withheld from your wages as paid on the dates it was actually withheld instead of in equal amounts through the year?
Should I consider these options?I've never done either of these things, but I'm willing to consider them if it will eliminate the penalty. But if they are a big hassle I will just pay the $37 and learn my lesson on this one.
