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My understanding of the underpayment penalties is that generally you are exempt from penalties as long you pay either 90% of this year's tax owed through witholding, or 100% of last year's tax owed, and that there are no exceptions for this except for certain self-employed or high-income workers, neither of which apply to me.

I am in a situation where I only worked a paid internship last year, and through tax credits and deductions my total tax bill on last year's return was $0 (I received a refund for everything that was withheld last year). Since 100% of last year's tax owed would concordantly be $0, then does that basically mean that I don't have to have anything withheld this year, and I can simply pay my taxes in full next April?

I've already had money withheld this year (so I don't have $0 withheld), but do I need to withhold any more to avoid penalties? Should I file a W-4 that says I'm exempt from federal taxes or claim some absurd number of allowances? My understanding is that I could, but that seems odd since virtually everyone starting working for the first time would not have to withhold anything and could simply pay their taxes in full with their federal tax return filing.

  • You may not be penalized for not withholding, but you're not exempt, and you will have to cough up the money in April. – littleadv Jul 19 '15 at 23:55
  • Some people have to withhold 110% of their prior year's total tax. Luckily 110% of zero is still zero! – stannius Mar 1 '16 at 16:26
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You can't write exempt because according to the instructions on the W-4

I claim exemption from withholding for 2015, and I certify that I meet both of the following conditions for exemption.

  • Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and
  • This year I expect a refund of all federal income tax withheld because I expect to have no tax liability. If you meet both conditions, write “Exempt” here ...............

You don't meet the second condition.

But you can increase the number of allowance to reduce the amount of taxes. Just make sure you put enough money aside into a savings account so that you can pay the taxes in the spring.

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