Underpayment Penalty Question

[deuce7402]

Wife made an IRA to Roth IRA conversion last December which greatly increased our income, therefore we made an estimated tax payment to cover the tax withholding shortfall on Jan 17, 2023.  That payment amount was based on IRS guidance for greater than $150K AGI (the lesser of 110% of last year's tax liability OR 90% of the current year's liability).

For 2022, our tax liability with the conversion was $30,022. Our withholdings totaled $10,244. I elected to use the 110% of last year's tax as that was a known. I arrived at the estimated payment amount by taking the 110% of last year and subtracting what was withheld during the year resulting in $21,290 as the payment made. Even with this approach, an underpayment is being calculated by TT even though a refund is final result.  Where did I error in understanding the guidance from the IRS? And is TT calculating correctly?

[RobertB4444 · Accepted solution]

The IRS views taxes due as when you earn the money, not when you file the return.  The system has annualized your wife's transfer and spread it out over the course of the year instead of setting it up as all-at-once along with your payment.  So, the system is wrong but it's doing the best it can with the information it has.  

Go to 'Other Tax Situations' in your federal return and click start next to underpayment penalties.  The system will walk you through your income over the year and showing the math for where your transfer was made and where your payment was made should remove the penalty from your return.

@deuce7402 

[VolvoGirl]

You might be able to eliminate it or at least reduce it.  You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you.  It's form 2210.

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

If you have the desktop program you can switch to Forms Mode (click forms in the upper right (left for Mac)) and open the 2210 form.  If the 2210 doesn't show up in the left column, click on Open Forms at the top of the left column.  Type 2210 in the search box and open the 2210 form.  Check box C to let the IRS calculate it.

[deuce7402]

Following your advice greatly reduced the penalty. It did not eliminate it altogether. Now, is there a similar process for the State return (Indiana)?  Thank you for your assistance.

[deuce7402]

Thanks VolvoGirl. I was able to greatly reduce the penalty following the above advice.

[VolvoGirl]

I think it should be near the end of the state return.