Do You Think You May Have Under-Withheld Taxes This Year?

 Should your liability be greater than your prepayments by $1,000 or more, you may also be subject to underpayment penalties. This could simply be the result of under-withholding on your wages or underpaying estimated tax if you are self-employed, or of out-of-the-ordinary income, such as stock gains, sale of a business or rental or even winning big from the lottery. There are safe harbor prepayments to avoid a penalty, which require prepaying:

• 90% of the current year’s tax liability,

• 100% of the prior year’s tax liability, or

• 110% of the prior year’s tax liability, if the prior year’s AGI was over $150,000.

If you think there’s a chance that the income taxes you’ve paid to date for 2025 are insufficient, it’s a good idea to increase your withholding in the time that’s left before year-end to make up for it. Underpaying taxes makes you vulnerable to an underpayment penalty that is assessed quarterly. The good news is that even if you have underpaid for any or all the first three quarters of the year and will owe taxes when you file your 2025 return, you can catch up by boosting your year-end withholding, since federal withholding is deemed paid ratably throughout the year. Plus, increased withholding and possible payment of estimated taxes can also reduce the fourth quarter underpayment penalty.