Form 2210 Underpayment Penalty 2026: Safe Harbor, 7% Rate, Late Gains

What the penalty is, in one formula

The statute, 26 U.S.C. 6654(a), adds to your tax an amount determined by applying three things: “the underpayment rate established under section 6621,” to “the amount of the underpayment,” for “the period of the underpayment.” The IRS page on the penalty says it uses the same three inputs: the amount of the underpayment, the period when it was due and underpaid, and the published quarterly interest rates for underpayments.

The Form 2210 penalty worksheet turns that into one line for each rate period: the underpayment, times the number of days, divided by 365, times the rate. Our example below does the same sum. The period runs from the installment's due date to the day you pay it or to April 15 of the next year, whichever comes first (Form 2210 worksheet, rate-period lines).

The rate for individuals is the federal short-term rate plus 3 percentage points, reset each quarter (IR-2026-98). For 2026 the IRS table shows:

Source: IRS “Quarterly interest rates” page, 2026 table, and IR-2026-98 of August 21, 2026 for the fourth quarter (Revenue Ruling 2026-15, Internal Revenue Bulletin 2026-36). The last column is our arithmetic. The IRS had not announced the first-quarter 2027 rate on October 26, 2026.

The IRS says the fourth-quarter rate “will remain the same,” and the second-quarter figure was 6 percent, so a penalty that straddles the year can mix 6 and 7 percent. The statute compounds the rate daily; the Form 2210 worksheet multiplies days by the rate without compounding, and our example follows the worksheet.

Three ways to avoid it: the safe harbors

The required annual payment is divided into four equal installments. Under 26 U.S.C. 6654(d)(1), you owe no penalty if you pay each installment in full, and each is a quarter of the lesser of these:

• 90 percent of the 2026 tax. You cannot measure it until the year ends, which is the problem when income arrives late.
• 100 percent of the 2025 tax. Publication 505 (2026) adds that “Your 2025 tax return must cover all 12 months.”
• 110 percent of the 2025 tax if your 2025 AGI was above $150,000. Publication 505 (2026) says: “If your AGI for 2025 was more than $150,000 ($75,000 if your filing status for 2026 is Married filing a separate return), substitute 110% for 100%.”

The AGI that sets the 110 percent is last year's. Form 2210's own 2025 instructions use 2024 AGI for the 2025 year; for 2026 it is 2025 AGI, and a reader whose 2025 included a large gain is likely already in the 110 percent group. Farmers and fishers with at least two-thirds of gross income from farming or fishing use 66 2/3 percent in place of 90 percent and file Form 2210-F in some cases; the reader of this page is probably not one.

If your tax is a few thousand dollars higher than you thought, the prior-year test is the one that does not depend on the answer. Our estimated tax calendar page sets out the four dates and the late-K-1 problem.

The $1,000 exception counts only withholding

Under 26 U.S.C. 6654(e)(1), no addition to tax applies if the tax shown on the return, “reduced by the credit allowable under section 31,” is less than $1,000. The Instructions for Form 2210 (2025) put it as “The total tax shown on your 2025 return minus the amount of tax you paid through withholding is less than $1,000.”

Section 31 is tax withheld on wages. Estimated tax payments are not subtracted in this test (our reading of the statute and the instructions). A holder of investment funds with no wages, owing $4,000 with the return, has $4,000 on that line however much of it was paid in April and June, so the exception does not help.

Exceptions and waivers: what the IRS actually lists

Two exceptions mean no penalty and no Form 2210. The first is the $1,000 test above. The second, from the 2025 instructions: “You had no tax liability for 2024, you were a U.S. citizen or resident alien for the entire year,” and the prior return covered 12 months. Estates and certain trusts have a two-year rule, and farmers and fishers who file and pay by early March have another; neither is the usual case here.

A waiver is something the IRS decides. The instructions say all or part of the penalty will be waived if the IRS determines that:

• “In 2024 or 2025, you retired after reaching age 62 or became disabled, and your underpayment was due to reasonable cause (and not willful neglect).” Section 6654(e)(3)(B) says the same for the year the payments were required or the one before, so for 2026 that is 2025 or 2026.
• “The underpayment was due to a casualty, disaster, or other unusual circumstance, and it would be inequitable to impose the penalty.”

To ask for one you file Form 2210 with a statement. The instructions say to “Attach Form 2210 and a statement to your return explaining the reasons you were unable to meet the estimated tax requirements and the time period for which you are requesting a waiver,” with documentation of the retirement date or the police and insurance reports. Retirement alone is not the test: it is retirement after 62, or disability, plus reasonable cause for the shortfall. Receiving a first pension, IRA or 401(k) distribution is not itself an exception (our reading); we found no such rule in the statute, Publication 505 or the Form 2210 instructions.

Withholding: deemed paid in four equal parts

Section 6654(g)(1) says an equal part of the withholding credit “shall be deemed paid on each due date for such taxable year, unless the taxpayer establishes the dates on which all amounts were actually withheld.” The Form 2210 instructions give it in plain words: “you are considered to have paid one-fourth of these amounts on each payment due date unless you can show otherwise.”

That deeming rule is why a late-year increase in withholding (a larger paycheck withholding, an IRA distribution with tax withheld, a year-end withholding election) works backward. Estimated payments, by contrast, count on the day paid, and the Form 2210 instructions say that payments “are applied first to any underpayment balance on an earlier installment even if you designate a payment for a later period.” Whether this is a good idea for you is a question for your CPA, not a recommendation (our reading).

Schedule AI: the annualized method for a late-year gain

The instructions describe the case: “If your income varied during the year because, for example, you operated your business on a seasonal basis or had a large capital gain late in the year, you may be able to lower or eliminate the amount of one or more required installments by using the annualized income installment method.”

How it works, from the instructions and Publication 505 (2026):

• Four cumulative periods: January 1 to March 31, January 1 to May 31, January 1 to August 31, and the full year.
• You annualize the income of each period, work out the tax, and multiply by 22.5, 45, 67.5 and 90 percent (Worksheet 2-9). The instructions say to include “your share of partnership or S corporation income or loss items for the period,” which is where K-1 income comes in.
• If you use Schedule AI for any due date, you “must use it for all payment due dates.”
• You file Form 2210 with Parts I, II and III and Schedule AI with the return, even if no penalty results (Publication 505 (2026) says this for anyone using the method).

The weak point for a K-1 holder is the second bullet: a fund that reports only annual income makes the January-to-August figure an estimate (our reading). A gain on a sale is easier, because the closing date of the sale is the period.

A worked example: a $40,000 gain in December (our arithmetic)

Both taxpayers below are hypothetical, and every assumption is ours. We assume $75,000 of 2026 tax before the gain, earned evenly through the year. We assume the $40,000 long-term gain, realized in December 2026, is taxed at a combined 18.8 percent (15 percent plus the 3.8 percent net investment income tax), which is $7,520. The IRS rates are the table above, with 7 percent assumed for January to April 15, 2027.

Case A: the prior-year safe harbor. 2025 AGI of $400,000 and 2025 tax of $60,000.

The gain changed what is due in April, not the installments. That is the whole value of the 110 percent test.

Case B: the current-year test, because 2025 was bigger. Say 2025 tax was $120,000 after a large 2025 gain, so 110 percent is $132,000. The taxpayer planned in the spring without the 2026 gain, paid 90 percent of $75,000 ($67,500) in four payments of $16,875, and then sold in December. The lesser of $132,000 and 90 percent of $82,520 is $74,268, so each installment should have been $18,567.

Now the three levers, each on the same $74,268 requirement:

The numbers are small, and that is the honest reading of the penalty for a one-year gain: it is interest on a shortfall, not a fine. It grows with the size of the shortfall and the time it stays open. The pattern is also the reason to look at the safe harbor in October, not in April.

Where K-1, dividend and sale income lands

Each of the three kinds of income an investor holds hits the four installments differently (our reading):

For the K-1 timing of three named funds see our estimated tax page; for what each K-1 box means, the K-1 boxes page; for the 3.8 percent tax inside the estimate, the net investment income tax page.

Who files Form 2210, and when the IRS bills you

The 2025 instructions say: “The IRS will generally figure your penalty for you and you should not file Form 2210.” You file it to request a waiver, or when you use Schedule AI, which sits inside the form. If you file by the due date, the instructions say “no interest will be charged on the penalty if you pay the penalty by the date shown on the bill.”

The 2026 instructions were not on the IRS Form 2210 page on October 26, 2026, which still showed the 2025 revision as current, so every Form 2210 line in this page is from the 2025 text. Rates, dollar thresholds and the form's period dates for 2026 returns may change when it is released (not verified).

What a holder can do with this

• Find the 2025 total tax and AGI. If AGI was above $150,000 ($75,000 if married filing separately), 110 percent of the tax divided by four is the installment that protects you.
• Add what you paid on April 15, June 15 and September 15, 2026 and any withholding (a quarter of it counts on each date unless you can show otherwise). Compare it with that figure.
• Decide before January 15, 2027. A payment that day stops the penalty from growing on the fourth installment; it does not erase the earlier ones, unless you can use Schedule AI.
• Raise withholding if you have it available. For a salaried spouse or a retirement distribution it counts as paid evenly through the year.
• Keep the sale dates and the K-1 or 1099 dates, because Schedule AI needs income by period.
• If you cannot meet 90 percent or 110 percent, note whether a waiver reason applies and keep the papers.

What to ask your CPA

1. What are my 2025 total tax and AGI, and is my safe harbor 100 percent or 110 percent?
2. What have I paid in estimated tax and withholding by installment, and on what dates was withholding actually taken?
3. Would Schedule AI lower my 2026 penalty, given the date of my sale or the timing of my K-1?
4. If I am short, is a January 15 payment or extra withholding cheaper than paying with the return?
5. Do I qualify for a waiver, and what papers would it need?
6. Is the 3.8 percent net investment income tax in my estimate?

This is analysis of public documents, not investment, legal or tax advice. The person who can say what you owe is a CPA or tax attorney with your return.

FAQ

Sources, read and saved on October 26, 2026: 26 U.S.C. 6654 (Legal Information Institute, Cornell Law School, text of the United States Code); Instructions for Form 2210 (2025, the current revision on the IRS Form 2210 page, last updated April 30, 2026) at irs.gov/instructions/i2210; IRS Publication 505 (2026) at irs.gov/publications/p505; IRS news release IR-2026-98 of August 21, 2026 on the fourth-quarter 2026 interest rates (Revenue Ruling 2026-15); IRS “Quarterly interest rates” page; IRS page “Underpayment of estimated tax by individuals penalty.” Calculations marked “our arithmetic,” the two taxpayers and the 18.8 percent rate on the gain are ours. This is analysis of public documents, not investment, legal or tax advice.