DEFINITION of 'Underwithholding'

Inadequate withholding of taxes from wages or other income during the year. Underwithholding will result in a balance due upon filing. Significant underwithholding can result in a nasty surprise for the taxpayer, especially if there is substantial interest and penalties involved. Generally, it is often a good idea to overwithold taxes to avoid a financial surprise at filing time that could become a significant financial burden.

BREAKING DOWN 'Underwithholding'

Some taxpayers deliberately choose to have their taxes underwithheld, for various reasons. Sophisticated taxpayers may be able to invest the amount that would otherwise be withheld more profitably throughout the year and still come out ahead after paying the tax. Others simply may not wish to have the government hold on to their money during the year and keep it in a separate account to earn interest instead.

RELATED TERMS
  1. Tax Liability

    The total amount of tax that an entity is legally obligated to ...
  2. Substitute Return

    A tax filing that the IRS will create for a taxpayer in order ...
  3. Withholding Tax

    1. Income tax withheld from employees' wages and paid directly ...
  4. Section 1341 Credit

    A tax credit available for taxpayers who are repaid in a later ...
  5. Tax Benefit

    A tax benefit is an allowable deduction on a tax return intended ...
  6. IRS Publication 505

    A document published by the Internal Revenue Service that outlines ...
Related Articles
  1. Taxes

    What is Withholding Tax?

    Withholding tax is the income tax federal and state governments require employers to withhold from employee paychecks.
  2. Taxes

    Tax Withholding: Good For Government, Bad For Taxpayers

    It's important to understand where that money coming out of your paycheck goes and why - after all, you earned it.
  3. Taxes

    Understanding The U.S. Tax Withholding System

    Understanding the origins of our tax withholding system is crucial to getting the most out of it.
  4. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  5. Taxes

    Form 9465: Don't Pay Your Back Taxes Without It

    This form can lighten your tax load if you owe Uncle Sam.
  6. Taxes

    Start Over With The IRS

    If you're struggling to pay back taxes, try a fresh start with the IRS. They really can help.
  7. Taxes

    Federal Tax Brackets

    Why do we have income tax brackets? What do they do for us? Read this to understand the basics and where to find your own bracket.
  8. Taxes

    New Tax Rules Target The Top Tax Bracket

    The American Taxpayer Relief Act brings about new tax rules for the wealthy that people such as Warren Buffett have been calling for over the last few years.
  9. Taxes

    When You Should Change Your Withholding Tax

    When there are major changes in your life, you should adjust your withholding to ensure you aren't paying too much in taxes.
  10. Taxes

    Confused About Estimated Tax Deadlines for 2016?

    If you run a business or have investment income, pay attention to this year's estimated tax deadlines. Here are the details, and what's new for 2016.
RELATED FAQS
  1. What's the difference between short-term investments and marketable securities?

    Read about withholding taxes, how they work, and why there are both federal and state withholding lines on the typical American's ... Read Answer >>
  2. What's the difference between a tax rate and a tax bracket?

    These two terms are often incorrectly used interchangeably. Find out the difference between your tax rate and your tax bracket. ... Read Answer >>
  3. Where can I find a good withholding tax table on the Internet?

    Learn where to find the most current withholding tax tables and other information about how income tax withholding rates ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center