How do I know if I had to pay an underpayment penalty?

[litex2x]

I filed last weekend and owed a lot due to RSUs, ESPP, and capital gains. I recently chatted with a friend who mentioned there is a penalty for not withholding enough. I made no estimated tax payments and claim zero exceptions. Is there an easy way I can tell if paid this penalty by looking at my tax return?

[VolvoGirl · Accepted solution]

Yes the underpayment penalty will be on 1040 line 38.  It either reduces a refund on line 35a or is included in the tax due on line 37.

[litex2x]

Looks like I didn't owe any taxes. Maybe I misunderstood the rule. Is the under payment penalty  for not withholding enough or for something else?

[VolvoGirl]

Yes it's for not paying enough withholding.   If you do not pay enough tax, you may have to pay a penalty for underpayment of estimated tax. Even if you are getting a refund you can still owe a penalty for not paying in evenly during the year.  Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. It is included in your tax due or reduces your refund.

[DawnC]

It is for not withholding enough tax during the year.   However, if your withholdings this year were as much as your tax liability last year, you would not incur a penalty.  You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:

• Your filed tax return shows you owe less than $1,000 or
• You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less.

IRS - Underpayment penalties.   TurboTax would have warned you about the penalty if you had incurred one.  

[litex2x]

Okay now I am confused again. I ended up only withholding about 83% of my total tax (box 24). How is it my box 38 is empty in this case? I see in another reply that if had paid more in taxes than the previous year, then this might be why I incurred no penalty. Do I need to now start making estimated tax payment if my income will be roughly the same this year?

[MonikaK1]

Yes, if you paid more in tax for 2023 than you owed for 2022, this can explain why you are not seeing a penalty. Generally, most taxpayers will avoid the underpayment penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.

You can either adjust your withholding on wages or another type of regular income such as pensions, or make estimated payments if you are not on track to pay at least 90% of what you expect to owe for 2024. 

See IRS Topic 306 for more information.