Safe harbor to avoid underpayment penalty

[WashingtonResident]

In Fall 2024, I calculated the safe harbor by multiplying 1.1 by my total tax from 2023. I then looked at my paystub and extrapolated what I thought I'd pay in taxes through the rest of 2024, and it seemed like I was comfortably over the safe harbor amount. But as I'm doing my taxes now, TurboTax is saying I'll have a modest underpayment penalty. How can I improve the way I'm calculating my numbers so I don't incur another penalty next year? For example, maybe I didn't look at the correct lines on my paystub, or maybe I didn't factor in that some items get maxed out towards the end of the year, resulting in larger year-end paychecks? Or maybe there's some other way to avoid underpaying?

[VolvoGirl]

I don’t know about figuring for 2025.  But for the underpayment penalty……

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

[RobertB4444]

Do what @VolvoGirl says for this year.

If you are multiplying your total tax - not the amount that is due after withholding and everything but the total tax - by 1.1 you should be fine with the penalty avoidance.

@WashingtonResident 

[WashingtonResident]

Thanks @VolvoGirl and @RobertB4444. I don't have a Form 2210. I see where it says that the IRS will figure it out for you. Is that the same thing as TurboTax doing the calculation? TurboTax gave me an amount I owe for the penalty, but I don't know where it got that number. 

[DawnC]

No, it is not the same thing.  If you mark the Let the IRS figure the penalty and bill me later, Form 2210 does not get sent to the IRS.  Underpayment of estimated tax by individuals applies when you don’t pay estimated tax accurately or on time as an individual.

If you want TurboTax to figure the penalty, don't check that box (Let the IRS figure the penalty) and go through the penalty interview.  You will also be asked if you want to try to lower or eliminate the penalty by annualizing your income.   Or you can request a waiver.  For any of these options, Form 2210 is included in your return and sent to the IRS.   Your estimated penalty will show on Line 38 - that has to be paid in addition to your tax due from Line 37 if you are choosing to include the penalty instead of letting the IRS figure the penalty.

The simplest option is to check the box and allow the IRS to figure the penalty.   But if you want to remove or reduce the penalty, you need the Form 2210 completed.  

If you meet the conditions below; there is no penalty.  From IRS topic - Underpayment of Individual Estimated Tax

• 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. If your adjusted gross income (AGI) for 2023 was more than $150,000 ($75,000 if your filing status for 2024 is married filing separately), substitute 110% for 100%.

The IRS urges taxpayers to check into their options to avoid these penalties.

• Check your withholding often and adjust it when your situation changes. To do this fill out a new Form W-4 and give it to your employer. The Tax Withholding Estimator is a helpful tool.
• Estimated tax is the method used to pay tax on income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.). Use Form 1040-ES to figure and pay estimated taxes on time.

How the penalty is calculated