Taxes take a big chunk of your income each month. It’s tempting to try to eliminate your tax payments for a few months with the intent of making it up later. It’s tempting but generally not recommended. Taxes are pay-as-you-go -- either forcibly withheld from your paycheck or paid quarterly through estimated taxes. You can lower your withholding or you can stop paying your estimated taxes for a quarter but not without a possible penalty.
The common method of paying federal taxes is through payroll withholding. Citizens who have an employer are automatically signed up to pay taxes each pay period. The exact amount paid depends on the allowances you claim on the W-4 Employee’s Withholding Allowance Certificate. You cannot cancel withholding by your employer for a few months. You may temporarily increase your allowances -- but there could be a penalty later. By increasing your allowances, you lower the amount of taxes taken from your paycheck.
Taxpayers who do not have conventional income, such as sole proprietors and independent contractors, must pay estimated taxes. Likewise, if you earn income from rent, dividends or alimony, you must pay taxes on the amount received every three months. Estimated taxes are paid to the IRS on a set schedule every quarter. Failure to pay your taxes may result in an underpayment penalty assessed by the IRS.
When you come up short at tax return time, you pay end up with an underpayment penalty. As long as your withholding or the sum of your estimated tax payments -- or the combination of both -- was at least equal to the amount of taxes you owed the prior year, you do not have to pay an underpayment penalty, no matter how much you underpaid. You may also avoid the penalty if the total underpayment is less than $1,000, or if the underpayment is less than 10 percent of your total taxes owed for the year. If you do owe the penalty, you may figure it when you file your tax return using Form 2210. If you choose not to calculate the penalty, the IRS assesses the underpayment penalty and sends you a bill.
The IRS accepts requests to waive the underpayment penalty if you cannot afford it or if a hardship caused you to underpay your taxes. In cases of disability, disaster or another unusual circumstance, you can file Form 2210 and attach documentation of the reason you missed your payment, such as a police report or insurance paperwork. The IRS reviews your waiver request and issues a decision in writing.
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