Exceptions(p55)

Generally, you do not have to pay an underpayment penalty if either:

• Your total tax is less than $1,000, or
• You had no tax liability last year.

You do not owe a penalty if the total tax shown on your return minus the amount you paid through withholding (including excess social security and tier 1 railroad retirement (RRTA) tax withholding) is less than $1,000.

For 2008, your total tax on Form 1040 is the amount on line 56 increased by certain other taxes and reduced by certain refundable credits.

Add the total of the following taxes to the amount on Form 1040, line 56.

• Self-employment tax (line 57).
• Tax from recapture of investment credit, low-income housing credit, qualified electric vehicle credit, Indian employment credit, new markets credit, alternative motor vehicle credit, alternative fuel vehicle refueling property credit, or credit for employer-provided childcare facilities (included on line 61).
• Tax on early distributions from (a) an IRA or other qualified retirement plan, (b) an annuity, or (c) a modified endowment contract entered into after June 20, 1988 (included on line 59).
• Tax on distributions from a Coverdell education savings account or a qualified tuition program not used for qualified education expenses (included on line 59).
• Tax on Archer MSA, Medicare Advantage MSA, or health savings account distributions not used for qualified medical expenses (included on line 61).
• Additional tax on a health savings account because you did not remain an eligible individual during the test period (included on line 61).
• Section 72(m)(5) excess benefits tax (included on line 61).
• Advance earned income credit payments (line 60).
• Tax on accumulation distribution of trusts (included on line 61).
• Interest due under sections 453(l)(3) and 453A(c) on certain installment sales of property (included on line 61).
• An increase or decrease in tax as a shareholder in a qualified electing fund (included on line 61).
• Tax on electing small business trusts included on Form 1041, Schedule G, line 7 (included on line 61).
• Tax on income not effectively connected with a U.S. trade or business from Form 1040NR, lines 52 and 55 (included on line 61).
• Household employment taxes, including any advance EIC payments made to your employees (line 60). See the Instructions for Form 2210, Line 2, for an exception to including this amount.
• Additional tax on income you received from a nonqualified deferred compensation plan that fails to meet certain requirements (included on line 61).
• Additional tax on recapture of a charitable contribution deduction relating to the contribution of a fractional interest in tangible personal property (included on line 61).

From the total of Form 1040, line 56 and the other taxes listed above, subtract the following refundable credits.

• Earned income credit (line 64a).
• Additional child tax credit (line 66).
• Credit for federal tax paid on fuels (included on line 68, box b).
• Refundable credit for prior year minimum tax (line 68, box c).
• Health coverage tax credit (included on line 68, box d).
• First-time homebuyer credit (line 69).
• Recovery rebate credit (line 70).

Your total tax on Form 1040A is the amount on line 37 minus the amount on lines 40a, 41, and 42. Your total tax on Form 1040EZ is the amount on line 11 minus the amount on lines 8a and 9.

For 2008, the amount you paid through withholding on Form 1040 is the amount on line 62 plus any excess social security or tier 1 RRTA tax withholding on line 65. On Form 1040A, the amount you paid through withholding is the amount on line 38 plus any excess social security or tier 1 RRTA tax withholding included on line 43. On Form 1040EZ, it is the amount on line 7.

You do not owe a penalty if you had no tax liability last year and you were a U.S. citizen or resident for the whole year. For this rule to apply, your tax year must have included all 12 months of the year.

You had no tax liability for 2007 if your total tax was zero or you were not required to file an income tax return.

Ray, who is single and 22 years old, was unemployed for most of 2007. He earned $2,700 in wages before he was laid off, and he received $2,500 in unemployment compensation afterwards. He had no other income. Even though he had gross income of $5,200, he did not have to pay income tax because his gross income was less than the filing requirement for a single person under age 65 ($8,750 for 2007). He filed a return only to have his withheld income tax refunded to him.

In 2008, Ray began regular work as an independent contractor. Ray made no estimated tax payments in 2008. Even though he did owe tax at the end of the year, Ray does not owe the underpayment penalty for 2008 because he had no tax liability in 2007.

For 2007, your total tax on Form 1040 is the amount on line 57 increased by certain other taxes and reduced by certain refundable credits.

Add the total of the following taxes to the amount on Form 1040, line 57.

• Self-employment tax (line 58).
• Tax from recapture of investment credit, low-income housing credit, qualified electric vehicle credit, Indian employment credit, new markets credit, alternative motor vehicle credit, alternative fuel vehicle refueling property credit, or credit for employer-provided childcare facilities (included on line 63).
• Tax on early distributions from (a) an IRA or other qualified retirement plan, (b) an annuity, or (c) a modified endowment contract entered into after June 20, 1988 (included on line 60).
• Tax on distributions from a Coverdell education savings account or a qualified tuition program not used for qualified education expenses (included on line 60).
• Tax on Archer MSA, Medicare Advantage MSA, or health savings account distributions not used for qualified medical expenses (included on line 63).
• Additional tax on a health savings account because you did not remain an eligible individual during the test period (included on line 63).
• Section 72(m)(5) excess benefits tax (included on line 63).
• Advance earned income credit payments (line 61).
• Tax on accumulation distribution of trusts (included on line 63).
• Interest due under sections 453(l)(3) and 453A(c) on certain installment sales of property (included on line 63).
• An increase or decrease in tax as a shareholder in a qualified electing fund (included on line 63).
• Tax on electing small business trusts included on Form 1041, Schedule G, line 7 (included on line 63).
• Tax on income not effectively connected with a U.S. trade or business from Form 1040NR, lines 53 and 56 (included on line 63).
• Household employment taxes, including any advance EIC payments made to your employees (line 62). See the Instructions for Form 2210, Line 2, for an exception to including this amount.
• Additional tax on income you received from a nonqualified deferred compensation plan that fails to meet certain requirements (included on line 63).
• Additional tax on recapture of a charitable contribution deduction relating to the contribution of a fractional interest in tangible personal property (included on line 63).

From the total of Form 1040, line 57 and the other taxes listed above, subtract the following refundable credits.

• Earned income credit (line 66a).
• Additional child tax credit (line 68).
• Credit for federal tax paid on fuels (included on line 70, box b).
• Health coverage tax credit (included on line 70, box c).
• Refundable credit for prior year minimum tax (line 71).

Your total tax on Form 1040A is the amount on line 37 minus the amount on lines 40a and 41. Your total tax on Form 1040EZ is the amount on line 10 minus the amount on line 8a.