Underpayment penalty when getting a refund

[BobboSRQ]

In addition to regular annuity payments that had FWT taken out, I also had 2 large withdrawals from my IRA during the year.  Immediately after taking the withdrawals I submitted estimated tax payments for them in the same quarter as the withdrawals.  The end result is that I have an overall refund for the year.  Yet Turbotax calculates a tax penalty.  It seems that Turbotax (and maybe the IRS) only takes into account the FWT when figuring the penalty and not the estimated payments I made.  I realize that I can ask for a waiver or ask the IRS to calculate the penalty, but why do I need to do this?  Also in actuality I didn't realize that Turbotax had added a penalty since it doesn't jump out at you in Turbotax that they are adding it, so I ended up paying the penalty.

[Mike9241 · Accepted solution]

the default method for penalties is that 1/4 of your taxes need to be paid in each quarter. withholding is allocated 1/4 to each quarter but estimates are allocated to the period paid. the only way to avoid penalties is to use the Annual Installment method for form 2210 or to use option A or B in Part II on the 2210 and provide a reason. the A/B method is at the discretion of the iRS. 

[SteamTrain]

Yep...the initial default calculation that is used, but both the IRS and TTX , does not take into consideration when the $$ were actually taken out, and thus, any large withdrawals gets spread over the entire 4 quarters, perhaps resulting in underpaid taxes for the first couple quarters (default calc only)......this happens especially if the extra income happened later  (large mutual fund distributions happen in Dec too that, by default, get spread over the whole year).  None of your tax forms from the providers actually indicate when the $$ were distributed (other than a 1099-B/8949 for stock transactions).

________

Yes, TTX and the IRS do have a way for you to minimize of reduce the penalty ahead of actually filing.  There's an Underpayment Penalty menu item on the "Other Tax Situations" page of the federal Q&A section

 to fill out the Annualized Income forms (form 2210/AI)....but that requires you to collect a lot of detailed information about exactly when you received all your income by "quarter" (3mo, 2mo,3mo,4mo), and other details too about tax withholding and exactly when your estimated tax payments were made relative to those income items. (I'd never bother for a penalty less than ~$50)

IF you received the excess income in the first one or 2 quarters of 2022, for which you did not pre-pay sufficient taxes during those quarters, there is not likely to be much of a reduction in the penalties or interest assessed......but that really depends on each person's exact situation.  But if you did pay estimated taxes to pay for that income..in the same quarter, then the penalty would likely be reduced or eliminated....but Like I said, it takes a long session gathering all the pertinent information.

[BobboSRQ]

Thanks - your explanations make sense (as much as the IRS can be said to make sense 🙂  ).