Underpayment penalty

Forum|Forum|2 years ago
March 1, 2024
2 replies
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I had virtually no taxable income until November when I did a Roth conversion. I paid the tax to the IRS at this time. Turbo Tax indicates I have an underpayment penalty because I did not pay quarterly estimated taxes. It would seem as long as I pay the tax on the money once earned, I shouldn't have to pay a penalty for tax on money I had not yet earned.

Is Turbo Tax applying tax law correctly here?

Best answer by Mike9241

the tax laws assume your income is earned evenly throughout the year. therefore 1/4 of your annual taxes must be paid in each period. However, there is a way to avoid penalty and that is to use the annualized income installment method (AIIM) for the whole year. see 2210 page 3. This is the only way to minimize or eliminate these penalties. however, you do have an option with withholding taxes if you have them. By default 1/4 of the annual total is assumed to be withheld each period. You can elect to use actual withholding for each period. you'll still have to use THE AIIM

https://www.irs.gov/pub/irs-pdf/f2210.pdf

BillM223

Unfortunately, we in the Community cannot see your private tax data, so we would be answering in the blind.

The 2210 is complicated...

Are lines 4 and 7 in Part I on your 2210 greater than $1,000?
Is Box C in Part II checked?
What are the values in all 4 columns on lines 10 and 11 in Part III?

This will get us started.

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Mike9241Answer

https://www.irs.gov/pub/irs-pdf/f2210.pdf

bleven1Author

Thank you so much for your help. This worked like magic.

[PII Removed]

aE77_2

Perhaps a follow up as I owe an Underpayment despite my seasonal income which happens in Q4 and flat overall income 2022 vs 2023 - yet I still owe the underpayment penalty (first time owing this despite using TT for 6 years with nearly identical income / seasonality).

More specifically, when using the annualization method, what exactly impacts the penalty? The options are:

1. AGI?

2. itemized deductions on Schedule A

3. Net Capital Gains

4. Deductions on Qualified Business Income

I've never had this issue in the past and the tax rules appear to be similar (I am getting a refund, as per past) so this seems like a TT issue (one of many it seems this year, doh!)