Contributed by: LynR, FreeTaxUSA Agent, Tax Pro
Do you owe more than $1,000 on your tax return? Did you receive a letter from the IRS stating you owe a penalty for underpayment of estimated taxes? If so, Form 2210 may help you.
A common misconception is if you pay all your tax owed by April 15th, you won't have any penalties. Unfortunately, this isn’t always true. The U.S. tax system is pay-as-you-go. You must make payments throughout the year as you earn or receive income. These payments can be made through withheld taxes (typical for wages through an employer, social security, or retirement payments) or as quarterly estimated tax payments (typical for self-employed individuals or capital gains income).
You'll be assessed an underpayment penalty if these two things are true:
- You owe $1,000 or more in tax after subtracting withholding and estimated payments, and
- Your withholding and timely estimated payments didn't total at least the smaller of:
- 90% of the current year's tax, or
- 100% of last year's tax (110% if your prior-year AGI was over $150,000, or $75,000 if single or married filing separately)
When should I file Form 2210?
If you have an underpayment penalty, the IRS will calculate it and send you a bill. However, Form 2210 is required in a few circumstances:
- You want to request a waiver of the penalty (e.g., due to casualty, disaster, retirement, disability, or other reasonable cause).
- You use the annualized income installment method because your income was uneven throughout the year (common for seasonal income, capital gains late in the year, etc.).
- You use actual withholding by period rather than assuming withholdings were even throughout the year (useful if your wages changed during the year).
Requesting a waiver
The IRS may waive your penalty if you retire after the age of 62 during the current or previous tax year, and your underpayment is due to reasonable cause and not neglect. If you have another reasonable cause, the IRS may also waive your penalty. To request a waiver, file Form 2210 with your tax return by April 15th (or October 15th if you filed an extension).
Annualized income installment method
The IRS doesn’t have a full record of when you earned your income throughout the year. When the IRS calculates your underpayment penalty, they assume your income was earned evenly throughout the year. They assess a penalty for each quarter you didn’t make sufficient estimated quarterly tax payments based on 1/4 of your total annual income. If the bulk of your income was earned later in the year, you may benefit from using the annualized income installment method. This method allows you to report how much of your annual income was earned by the end of each quarter. To use this method, you must file Form 2210 and fill out the Schedule AI section. Schedule AI asks for the cumulative income earned at the end of each quarter.
Actual withholding by period
This situation is less common, but Form 2210 can be used if your penalty is lower when you treat federal income tax withholding as paid on the dates it was actually withheld, instead of in equal amounts across all four quarters. This method is helpful when your income with federal tax withholding changed significantly throughout the year, such as a change in wages, receipt of taxable employee stock options, retirement mid-year, or a lump sum distribution from social security. This method doesn’t apply to self-employment income, which has no withholding.
When Form 2210 can't help
Form 2210 can't help to waive or lower your penalty if you legitimately had even income throughout the year and simply didn’t have enough tax withheld or didn't pay enough in estimated tax payments. Common situations where your underpayment penalty can't be reduced or waived include:
- You underwithheld taxes from your wages. In this case, you’ll need to file a new Form W-4 with your employer to adjust your withholding so you won’t owe taxes next year.
- You received income in the 4th quarter and didn’t have taxes withheld or make an estimated tax payment by January 15th.
- You’re a farmer or fisherman. If your underpayment penalty is due to farming or fishing income, you’ll need to file Form 2210-F instead.
Where can I find Form 2210 in FreeTaxUSA?
If your FreeTaxUSA account shows that you owe more than $1,000 in federal taxes when preparing your tax return, you can find Form 2210 by going to MISC > Payments > Underpayment Penalty (Form 2210).
💡Note: If you owe less than $1,000 or have a refund, this option won't show in your account.
On the Underpayment Penalty screens, the software will walk you through preparing Form 2210. If you find you need assistance preparing the form, consider adding our Pro Support upgrade. One of our Tax Pros will be happy to help.