To avoid penalties and interest from being imposed on the Internal Revenue Service, it is crucial to pay taxes on time. An example has been used to describe the calculation below.

Julie is responsible for paying $30,000 in taxes for 2024, and her employer deducted $27,200 from her salary. Julie's tax payments for the year were limited to the amount withheld. Underpayment penalties are assessed at a 6% rate.  What is the cost of Julia's penalty?

Julie paid $27,200 in taxes, even though she was responsible for $30,000. To avoid penalties, we will determine if she followed the safe harbor rule.

What is the safe harbor requirement?

• 90% of the tax that is due this year.
• The tax for the previous year is 100%, or
• If your AGI exceeds $150,000, you will be charged 110% of the previous year's tax.

Did Julie paid 90% of the current year?

$27,200/$30,000=90%. Julie paid 90% of the current year's taxes, so she won't have to pay any penalty. If a taxpayer owes less than $1,000 in tax after subtracting any withholding or credits, they can avoid penalties as well.