· Kyle Milner, CPA · Tax Planning · 3 min read
Smart Strategies to Reduce or Eliminate 2025 Estimated Tax Penalties
Missed or underpaid 2025 estimates? Use these IRS-approved tactics-from 60-day rollovers to targeted withholding-to erase or shrink the penalty.
If you missed one or more 2025 estimated tax payments, the IRS will typically assess an underpayment penalty. For 2025 the rate is 7 percent, compounded daily, and the IRS sets it quarterly (it stayed at 7 percent all year). Because the penalty functions like nondeductible interest, it’s more expensive than most loans. Cutting a check today stops future accruals, but it doesn’t erase what’s already due.
Fortunately, the tax code offers several penalty-reduction strategies-some can wipe out the charge entirely.
Strategy 1: 60-day retirement rollover with withholding
- Take a distribution from your IRA, 401(k), or other eligible plan and instruct the custodian to withhold federal income tax.
- Within 60 days, redeposit the gross amount into the same (or another) eligible account using other cash.
Because withholding is treated as if it were paid evenly throughout the year, the IRS “backfills” your missed quarters. The redeposit within 60 days keeps the transaction tax-free and penalty-free.
Watch-outs:
- The 60-day clock is rigid.
- IRA-to-IRA indirect rollovers are limited to one per 12 months (trustee-to-trustee transfers are unlimited; employer-plan-to-IRA direct rollovers aren’t limited).
- Required minimum distributions and inherited IRAs don’t qualify.
- Employer plan cash-outs withhold 20% by default-bring outside funds to redeposit the full gross amount.
Strategy 2: Increase year-end withholding
Ask your employer, pension administrator, or Social Security to raise withholding on your final 2025 payments (Forms W‑4, W‑4P, or W‑4V). Like the rollover withholding, these amounts count as though paid ratably throughout the year, covering earlier shortfalls.
Strategy 3: Use RMD withholding (age 73+)
If you’re taking RMDs, adjust the federal withholding on those distributions. A year-end RMD with substantial withholding is often the cleanest way for retirees to plug an estimated-tax gap.
Strategy 4: Annualize income with Form 2210 Schedule AI
If your income arrived unevenly-say Q4 was huge-use Schedule AI to match required installments to actual income timing. This often eliminates penalties if earlier quarters were legitimately low.
Strategy 5: Lean on the safe harbors
No penalty applies if your combined estimated tax and withholding equal at least 90% of your 2025 tax or 100% of your 2024 tax (110% if 2024 AGI exceeded $150,000 MFJ / $75,000 MFS). Even if 2025 taxes spike, hitting a safe harbor avoids penalties entirely.
Pitfalls to avoid
- Don’t run a payroll bonus solely for withholding. W‑2 wages bring payroll taxes and can reduce the §199A deduction for S-corp owners-often costlier than the penalty.
- Respect rollover rules. Missing the 60-day deadline, violating the one-rollover-per-year limit, or failing to replace mandatory withholding turns the distribution into taxable income (plus a 10% early-withdrawal penalty if you’re under 59½).
- RMDs/inherited IRAs. These can’t be rolled over; use withholding only.
Want help deciding which strategy fits your numbers before year-end?
