TurboTax Premier Incorrectly Calculated Underpayment Penalty Using Annualized Method

Forum|Forum|1 year ago
April 3, 2025
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I received a large chunk of my AGI in December 2024 from Required Minimum Distributions from tax free accounts (another thing that sucks about being in your 70's). As a result I was under withheld and was being charged an underpayment penalty of over $1,000. I figured this was exactly the situation that was meant to be addressed by using the annualized method (actually inputting when you received income as opposed to assuming it was equally spread throughout the year), so I went back to segment of the interview when the tax underpayment penalty was calculated and elected to use the annualized method. The interview then required me to allocate my received income into three periods--1/1-3/31/24; 1/1/-5/31/24 and 1/1-8/3124. I had to do this not only for ordinary income but also for Short Term Cap Gains, Long Term Cap Gains and Qualified Dividends. I also had to allocate certain taxes paid (Medicare Taxes, Foreign Taxes) among these periods. Assembling all this data was a fair amount of work--but at the end of the process, TurboTax was telling me there was no difference in my underpayment penalty--still over $1,000. I said this cannot be and decided to delve into the forms.

When I looked at the Form for calculating the underpayment penalty (Form 2210) on the first page of the Form in Part II there is a box to be checked "If your income varied during the year and your penalty is reduced or eliminated when figured using the annualized income method. You must figure the penalty using Schedule A1...". This box was not checked. I then navigated to Schedule A1 to Form 2210 and observed that none of the information on actual payment dates of income and taxes that I laboriously entered into the interview had been carried to the schedule. So I proceeded to manually re-enter the information in the appropriate boxes on the Schedule. Voila, my underpayment penalty was reduced by over $500.

It would appear to me that this is a programming glitch which is failing to transfer the information I entered in the interview to the Schedule. This is a fault in the program which was going to cost me real money.

Of course, there is no one to talk to at TurboTax to point this fault out to--so Buyer Beware.

Pip_12_mn

I am very interested in hearing TT response to this problem.

I am wondering if you had withholdings equal to 100% of last year's tax obligation if it would have avoided the penalty. That assumes the IRA custodian allows you to specify sufficient withholdings.

DaveF1006

Generally, if you had withholdings equal to 100% of last year's tax obligation, you might have avoided the underpayment penalty, provided your adjusted gross income (AGI) was $150,000 or less. The IRS allows taxpayers to avoid penalties if they pay either 90% of the current year's tax or 100% of the prior year's tax, whichever is smaller.

However, if your AGI exceeded $150,000, the threshold increases to 110% of the prior year's tax. Additionally, the IRS requires estimated tax payments to be made quarterly, so even if you met the withholding requirement, timing could still impact whether a penalty applies.

Your IRA custodian's rules on withholding are important here. Some custodians let you set withholding amounts, while others may have limits. You need to contact them to find out what their policy is in regards to setting your withholding amounts.

Underpayment of estimated tax by individuals penalty

@Pip_12_mn

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jstroebelAuthor

Thanks. Yes, I am aware of the IRS's requirements on withholding. Believe it or not, I am 74 years old and have never filed estimated tax returns. When I was working all my income was W-2 and was withheld by my employers. Since I have been retired I have continued not to file quarterly estimated tax payments and was mostly happy to pay underpayment penalties of a couple of hundred dollars at the end of the year to avoid having to file multiple tax returns. But this year the penalty was over $1,000 because of the December RMD's.

The reason for my posting was to point out that the TurboTax program was not working property. When I went back to my return and re-did the part that dealt with the underpayment penalty and went to all the trouble of annualizing capital gains (long and short term), qualified dividends and my ordinary income into the three mandated periods. I was dismayed to learn that TurboTax was still showing the same penalty. As I said in my original post, this was apparently because the new data that I input to annualize my income was not being carried from the interview onto the tax forms. When I did this manually, I got a quite different result and saved myself about $600. THE PROGRAM IS NOT WORKING PROPERLY AND SOMEONE AT TURBOTAX SHOULD LOOK INTO THIS.

NewStart78

Essentially the same scenario for us, including taking a lump sum RMD in December. Our annual income ended up higher than I had expected so we owed more tax, and therefore had to pay the "failure for proper estimated tax" penalty that TurboTax Deluxe calculated to be $332. Okay, whatever, but then last week we were refunded $297.10 by the IRS because they said that our penalty should have only been $24.90.

We have Federal tax withheld monthly from pensions, and also have a chunk of money taken out of the December RMD for Federal tax.

jstroebelAuthor

So, to clarify, did you use the "Interview" interface to enter the relevant information for calculation of the under withholding penalty or did you input your data directly into the appropriate forms (Form 2210 and its Schedule A1)? Did you ask the interview to see if your penalty could be lowered by annualizing your income?

NewStart78

Interview style only.

I did not interrogate the software. I just followed the interview path.

NOMDDC

100%. my income is largely Q4, and I annualized every year. The software follows until the end of my entries, and then the system reverts to previous calcs with a full penalty. This is a bug. Stay tuned...

jstroebelAuthor

Well, as they say, when it happens once--**bleep** happens. When happens twice, a coincidence; a third time and it's enemy action. So, we have three users posting in this thread who used the interview approach and tried to get the software to properly calculate an under payment penalty using the annualized income approach and the software fails to calculate the penalty properly. In my case, I used the interview approach and when it appeared to be incorrectly calculating the penalty (the indicated penalty did not change from the non-annualized approach), I checked the actual forms and found that none of the data that I had entered in the interview process had been carried to the forms.

TurboTax--are you listening??!!! There is a bug in your program.

ct8889

I have the same issue. My income is uneven throughout the year, and I received a major chunk of income in August 2024. After entering all the numbers TurboTax asks, the underpayment penalty stays the same.

Does anyone know how to fix this issue?

sandypca

Used 2024 Turbotax Deluxe. My income is primarily RMD and Capital Gains and Dividends, applied at the end of the calendar year. I responded to the Easy Chat and Turbotx determined no Penalty Due (this was the first year where the program said no penalty). Just received CP30 from IRS that Penalty Tax Due!! There is something wrong with the current Program. The last thing that I wanted was to hear from the IRS and be on their radar. Will prpbably consider an accountant for 2025 and stop using TT after decades of use.

baldietax

TT calculates penalty based on the information it's been given, the calculation on Form 2210 is straightforward especially if not adopting Annualized Income method. But IRS calculates the penalty independently, based on what they know for safe harbor amount based on 2023/2024 AGI/Tax, ES payment dates etc. Suggest looking further into why IRS vs. TT was different to avoid same in 2025. Also, if you usually get a penalty every year you may need to adjust withholding or pay some estimated tax.

jstroebelAuthor

So, I guess this will be my final post on this topic.

Just got a letter from the IRS. I am getting a refund of $52.14 because my under withholding penalty was improperly calculated on my return. To get the full story you will have to read my other posts on this topic, but TurboTax initially calculated my underpayment penalty at over $1,000. I went back to the portion of the Interview where data was input to enable the software to calculate the underpayment penalty and elected to use the annualized method, hoping that this would reduce the penalty since over half of my annual income came in the form of RMD's which were received in December. Amazingly, even after annualizing my income, this produced no reduction in the calculated underpayment penalty. I left the questionnaire and looked at the actual forms and noted that on the penalty worksheet, my new election to annualize my income had not been selected. I proceeded to manually complete the relevant forms and this time the penalty was reduced to $534. A sigh of relief.

Now in my mailbox I received a dreaded letter from the IRS. Good new! (I guess). TurboTax had overcalculated the under payment penalty and I am getting a refund of $52.14. I am not going to look this gift horse in the mouth, but there is a problem with the TT software in this area.