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In early Nov, my wife took an inherited IRA distribution, withholding 10% for federal taxes. TurboTax says we, filing jointly, have an underpayment penalty. True?

Forum|Forum|1 year ago
January 31, 2025
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Vanguard said we needed to withhold 10%, which we did. We also took the distribution in the last quarter of the year so couldn't pay any additional estimated taxes before year end. Not sure why TurboTax is saying we own a penalty.

Best answer by dmertz

Tax underpayment is determined on a quarterly basis. By default, income is treated as received evenly throughout the year, so unless you annualize income on Schedule AI of Form 2210, one-quarter of the distribution from the inherited IRA is treated as having been receive in each of the four tax quarters.

Also there was no requirement to withhold from the distribution 10% for federal income taxes. 10% is the default withholding if you do not request otherwise. However, tax withholding is, by default, similarly treated as having been received evenly throughout the year, so if your total tax withholding from all sources was sufficient to cover your entire tax liability, there should be no penalty. The fact that TurboTax is calculating a penalty implies that your tax withholding was insufficient. Annualizing income might reduce the penalties for Q1, Q2 and Q3, but probably not for Q4.

D

dmertzAnswer

Employee

Tax underpayment is determined on a quarterly basis. By default, income is treated as received evenly throughout the year, so unless you annualize income on Schedule AI of Form 2210, one-quarter of the distribution from the inherited IRA is treated as having been receive in each of the four tax quarters.

Also there was no requirement to withhold from the distribution 10% for federal income taxes. 10% is the default withholding if you do not request otherwise. However, tax withholding is, by default, similarly treated as having been received evenly throughout the year, so if your total tax withholding from all sources was sufficient to cover your entire tax liability, there should be no penalty. The fact that TurboTax is calculating a penalty implies that your tax withholding was insufficient. Annualizing income might reduce the penalties for Q1, Q2 and Q3, but probably not for Q4.