# Penalties and Interest, Estimated Tax Payments

For tax years beginning after December 31, 2009, if an Alabama taxpayer fails to pay a required installment of estimated tax in full by the due date, he is subject to a penalty(1). The amount of the penalty is

• The federal underpayment rate as adjusted each calendar quarter by the IRS
• Times the amount of the underpayment,
• For the number of days in the period of the underpayment divided by 365.

The amount of the underpayment is the excess of the required installment over the amount (if any) paid on or before the due date of the installment. The period of the underpayment runs from the due date of the installment to the earlier of

• The 15th day of the 4th month following the close of the tax year (the original due date of the return), or
• The date the installment was paid.

Example 1: John's required installment of \$500 for his 2010 Alabama income tax was due on April 15, 2010, but he didn't pay it until January 15, 2011 (275 days late). The Federal underpayment rate for the entire period was 4%. His penalty for failure to pay the installment is \$15.07 {\$500*4%*(275/365)}.

In general, there are four required installments each taxable year, and for calendar year taxpayers, the installments are due on April 15, June 15, and September 15 of the current year, and January 15 of the following year. If a due date falls on a weekend or holiday, the installment is due on the next business day after the weekend or holiday. Each payment is normally 25% of the "required annual payment", which is defined as the lesser of

• 90% of the total tax for the current year, or
• 100% of the total tax for the preceding year (110% if the Alabama Adjusted Gross Income in the preceding year was more than \$150,000).

Taxes withheld on wages are considered to be paid in ratably throughout the year, so they are subtracted from the required annual payment before determining the required installments.

Example 2: Jim and Judy, a married couple, expect that their 2010 Alabama tax will be \$4,000, while their total 2009 Alabama tax was \$3,200. Jim is self-employed and has no taxes withheld on his income, but Judy will have \$1,700 Alabama tax taken out of her salary. Their 2009 Alabama AGI was less than \$150,000. Jim and Judy's required annual payment is \$3,200 (100% of 2009 tax), since that is less than 90% of the current year tax (\$4,000 * 90% = \$3,600). Their required annual payment less Judy's withholding is \$1,500 (\$3,200 - 1,700 = \$1,500), and each of their four required installments will be \$375 (\$1,500/4 = \$375). Note that Jim and Judy should expect to have to pay \$800 additional tax when they file their 2010 return in April of 2011 (\$4,000 tax less \$1,700 withholding less \$1,500 estimated taxes paid = \$800 tax due). Even though they will owe tax with their return, they will not owe a penalty, since they paid in an amount equal to 100% of their total tax for the preceding year.

##### Exceptions

There are two exceptions to the general rules for estimated tax penalties:

• If the tax shown on the return, reduced by taxes withheld, is less than \$500, no penalty is imposed for failure to pay estimated taxes, and
• Neither is any penalty imposed if
• The taxpayer was a citizen or resident of the U.S. during the preceding taxable year,
• The preceding taxable year was not a partial year (it was a full 12 months), and
• The taxpayer did not have any Alabama tax in the preceding year.

In addition, the Commissioner has the authority to waive the penalty in cases of "casualty, disaster, or other unusual circumstances"; and the Commissioner can also waive the penalty for newly retired or disabled persons if the underpayment is not due to "willful neglect".

##### Annualization of Income

What about a situation where a taxpayer is not required to make estimated tax payments because her withholding is more than enough to cover the tax on her income; but late in the tax year, she recognizes a large gain on the sale of investment property? Will she be subject to a penalty for underpayment of estimated taxes because she didn't pay installments before she realized the gain? The answer to that, thankfully, is "No". She will still have to pay in the lesser of 90% of the current year, or 100%(110%) of the prior year, but the tax is divided equally among the installments that are due after the extra income was earned. Beware though, the annualization rules are a little complicated, and, especially if the numbers are pretty large, you probably will want to seek help from a qualified tax advisor if you are in this situation. Ideally, you'll want to consult your advisor before the transaction is finalized, so he or she can advise you about ways to structure the deal to your advantage.

### Interest on Late Payment of Tax

The Department of Revenue charges interest on unpaid taxes or any other amounts due to the Department(2) at the rate set by the U.S. Secretary of the Treasury.(3) Interest is computed on such late payments of income taxes from the original due date of the return.

### Late Payment Penalty

If an Alabama taxpayer fails to pay income taxes when due, the DOR imposes a late payment penalty of 1% for each month, or fraction of a month, that the payment is late, up to a maximum of 25%. The late payment penalty is in addition to the interest discussed above.(4)

For example, assume that a taxpayer files his 2009 return on the due date of April 15, 2010 showing a balance due of \$2,000; but he doesn't pay the balance due until September 20, 2003. In addition to the tax due, he must pay a late payment penalty of \$120 (6%*2,000) plus interest at the statutory rate. In addition, he may also have to pay a penalty for underpayment of estimated taxes if he has not met one of the exceptions discussed above.