Here’s why you might be facing an underpayment penalty and what you can do about it:Why the Penalty? Pay-As-You-Go System: The U.S. tax system operates on a pay-as-you-go basis, meaning taxes should be paid throughout the year as you receive income. Even if you're retired and didn't work, you might have other taxable income sources like Social Security benefits, pensions, or investment income. Estimated Tax Payments: If you didn't have enough tax withheld from your income or didn't make estimated tax payments, you could be subject to an underpayment penaltyHow to Avoid the Penalty Increase Withholding: Ensure that enough tax is withheld from your Social Security benefits, pensions, or other income sources. You can adjust your withholding by submitting a new Form W-4P to your pension provider or SSA Estimated Tax Payments: Make quarterly estimated tax payments if your withholding isn't sufficient to cover your tax liabilityAdditional Considerations Penalty Waiver: You might qualify for a waiver if you retired or became disabled in the past two years and had reasonable cause for underpayment - see here for instructions.For more details, you can check out the Kiplinger article on taxes for retireesand the IRS guide on estimated taxes .

Question

I have an underpayment penalty? I am retired, did not work or have any estimated income. Why the penalty? Thanks

Forum|Forum|1 year ago
April 1, 2025
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SabrinaD2

Here’s why you might be facing an underpayment penalty and what you can do about it:

Why the Penalty?

Pay-As-You-Go System: The U.S. tax system operates on a pay-as-you-go basis, meaning taxes should be paid throughout the year as you receive income. Even if you're retired and didn't work, you might have other taxable income sources like Social Security benefits, pensions, or investment income.
Estimated Tax Payments: If you didn't have enough tax withheld from your income or didn't make estimated tax payments, you could be subject to an underpayment penalty

How to Avoid the Penalty

Increase Withholding: Ensure that enough tax is withheld from your Social Security benefits, pensions, or other income sources. You can adjust your withholding by submitting a new Form W-4P to your pension provider or SSA
Estimated Tax Payments: Make quarterly estimated tax payments if your withholding isn't sufficient to cover your tax liability

Additional Considerations

Penalty Waiver: You might qualify for a waiver if you retired or became disabled in the past two years and had reasonable cause for underpayment - see here for instructions.

For more details, you can check out the Kiplinger article on taxes for retirees

and the IRS guide on estimated taxes

.