Why am I getting hit with 'underpayment penalty' when I'm filing taxes before April 18 deadline?

The underpayment penalty is confusing for many people! While you do have until April to file your return and pay any remaining balance, the U.S. tax system is actually "pay-as-you-go." This means the IRS expects you to pay taxes as you earn income throughout the year, either through withholding from paychecks or through quarterly estimated tax payments. When you have income that doesn't have taxes withheld (like stock sales with capital gains), you're supposed to make estimated tax payments quarterly. These deadlines are typically April 15, June 15, September 15, and January 15 of the following year. The underpayment penalty is essentially a fee for not paying enough taxes throughout the year. You can avoid the penalty if you: - Pay at least 90% of the tax for the current year, or - Pay 100% of the tax shown on your return for the prior year (110% if your AGI was over $150,000

I ran into this exact same issue last year after making some nice gains on Tesla stock. After reading through IRS publications and talking with different people, I discovered a really helpful tool called taxr.ai (https://taxr.ai) that analyzes your situation and explains these penalties in plain English. What I like about taxr.ai is that it explained WHY I was getting hit with the underpayment penalty and gave me options for what to do about it. It breaks down the calculation so you can see exactly how the penalty is determined and if there are any exceptions that might apply to your situation. It also helped me set up proper estimated payments for this year so I don't get hit with penalties again.

Just wanted to update after checking out taxr.ai that was mentioned earlier. I was also getting hit with an underpayment penalty (about $245) and was confused because I filed early. The tool explained that I had two options: either pay 90% of current year tax throughout the year OR 100% of last year's tax (which would have been easier to calculate). I didn't know about the "prior year safe harbor" rule. Turns out if I had just made estimated payments equal to my previous year's tax liability, I wouldn't have gotten the penalty at all, even with higher income this year! Now I've set up quarterly payments for this year based on their recommendation. Super helpful and way clearer than what my tax software was telling me.

If you're trying to deal with this underpayment penalty issue and want to talk to the IRS directly, good luck getting through to them... I spent HOURS on hold trying to get clarification on my own penalty situation. Then I found Claimyr (https://claimyr.com) which got me through to an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was really surprised it actually worked. The IRS agent I spoke with explained that I could request a first-time penalty abatement since I hadn't had any penalties before, and walked me through exactly what form to file and what to write on it. They also explained how to set up estimated payments for this year to avoid future penalties. Saved me a ton of time and frustration!

I have to admit I was completely wrong about Claimyr. After getting disconnected THREE TIMES trying to call the IRS myself about my underpayment penalty, I gave in and tried it. Within 20 minutes I was talking to an actual IRS representative who explained I qualified for the first-time penalty abatement since I hadn't had any issues the last three years. The agent walked me through Form 843 for requesting the abatement and told me exactly what to write in the explanation section. They also helped me set up estimated payments for this year so I don't get hit with another penalty. Honestly saved me both the penalty amount (around $320) and probably 5+ hours of frustration. Sometimes it's worth admitting when you're wrong!

Just to add some useful info about estimated tax payments for anyone who didn't know (like I didn't until I got hit with this penalty too): For 2025, the quarterly estimated tax payment due dates are: - 1st quarter: April 15, 2025 - 2nd quarter: June 16, 2025 - 3rd quarter: September 15, 2025 - 4th quarter: January 15, 2026 You can make these payments online through the IRS Direct Pay system or through the EFTPS (Electronic Federal Tax Payment System). I set calendar reminders now so I don't forget!

One thing nobody's mentioned yet - if most of your income is from W-2 employment, you can also adjust your withholding at your job instead of making separate estimated payments. I did this after getting hit with an underpayment penalty on some stock gains last year. I just submitted a new W-4 to my employer with additional withholding specified on line 4(c). I calculated how much extra I needed withheld for the year based on my expected capital gains, divided by remaining pay periods, and put that amount. Way easier than remembering quarterly payments!