Federal income tax operates under a pay-as-you-go system, requiring taxpayers to remit tax throughout the year as income is earned or received. This obligation is generally satisfied through wage withholding, estimated tax payments, or a combination of both.

Taxpayers who fail to pay sufficient tax during the year may be subject to the underpayment of estimated tax penalty. In general, the penalty can be avoided if the taxpayer:

• Owes less than $1,000 after subtracting withholding and refundable credits from their total tax liability;
• Paid at least 90% of the current year’s tax liability; or
• Paid 100% of the prior year’s tax liability (subject to applicable safe harbor rules), whichever requirement results in the lower payment threshold.

Special estimated tax rules and safe harbor provisions apply to farmers and fishermen.

For additional guidance on withholding, estimated tax requirements, and penalty calculations, refer to IRS Publication 505, Tax Withholding and Estimated Tax.

If the taxpayer qualifies for the prior-year safe harbor based on 100% of the preceding year’s tax liability, enter the prior-year tax information in the software using the steps outlined below.

TaxAct Online

Dashboard

1. From within the TaxAct return, click Taxes & Miscellaneous.
   • On smaller devices, click the menu at the top left corner of your screen, then make your selection.
2. Click the Additional Tax Payments drop-down.
3. Click Add beside Underpayment Penalty. 
4. Complete the rest of the interview process. 

Classic

1. From within the TaxAct return, click Federal. 
   • On smaller devices, click the menu at the top left corner of your screen, then make your selection.
2. Click Underpayment Penalty near the bottom of the list.
3. Complete the rest of the interview process. 

Desktop

1. From within the TaxAct return, click Federal. 
2. Click Miscellaneous and Select Underpayment Penalty from the topics list.
3. Complete the rest of the interview process.

Related Links

• Individuals – Underpayment Penalty