underpayment penalty

[km2438]

I never had to pay the tax underpayment penalty in previous years, and now all of a sudden I do even though my income is more or less consistent? And it was quite a lot. Is this something new or recent?  What is the rule for avoiding that?  Yes, perhaps lately my interest from banks are higher as it increases every year but how am I supposed to withhold for bank CD earnings?  Do I do a backup withholding or does that look bad?  Do I just pay in advance estimated taxes to the IRS?  I am afraid if I do the latter, I will lose that money that I paid and they won't consider that in my taxes for next year. And how would I go about doing that?  Do I wait until my CD closes or do I pay the IRS as I get interest per month?

[GCEA]

To avoid an underpayment penalty, keep these key steps in mind:

1. Meet safe harbor rules – You’ll need to owe less than $1,000 when filing and pay at least 90% of your current year’s tax liability or 100% of last year’s tax liability to avoid penalties.

2. Stay on top of payments throughout the year – You can do this by increasing your paycheck withholdings or submitting quarterly estimated tax payments directly through the IRS’s Make a Payment portal .

3. Adjust your withholdings – If needed, update your W-4 and use the IRS  Tax Withholding Estimator to help determine the right amount.

4. Request a waiver for penalties – If you’ve already incurred underpayment penalties, reach out to the IRS to request relief or file Form 843 (Claim for Refund and Request for Abatement) .

When estimating taxes, make sure to account for all income sources, including wages, interest income, capital gains, and more.

Best of luck! 

[AmyATX]

Underpayment penalties can really add up even if your income is fairly consistent.  

TurboTax automatically calculates estimated tax payments based on your income and withholding when you prepare a return using a safe harbor of the "prior year".  If you withholding was not enough to cover this minimum, you will see quarterly vouchers as part of your return (you will need to download a pdf copy of the return to see the vouchers themselves as they are not electronically filed with your return).  

If you make these quarterly payments and have the same or higher withholding, then you will avoid the penalties.  

Conversely, you can have your financial institution withhold funds from your investments which would then boost your overall withholding.

One thing to note, withholding from income items like bonuses, RSUs, etc, may not be substantial enough to cover those taxes.  In that case, it's advisable to make a tax payment (estimated tax payment) on those amounts to avoid being hit with underpayment penalties.  

The IRS also has a free tool that you can use to tweak your W-4 so that you reduce your risk of the under payment penalty:  https://www.irs.gov/individuals/tax-withholding-estimator

[km2438]

I still don't quite get it.  what about bank CDs?  some months I get interest and some months I don't when it ends.  can I do backup withholding option or is that a bad thing? ( what is backup withholding anyway?  is that like setting aside money for taxes or you shouldn't do that for normal people?)  do I pay quarterly for every month I receive CD interest or for in total of the end of year when the CD ends?  and for w-4, what does 0-4 mean for maximum/minimum money deduction for taxes?  how should you determine your number?

[km2438]

also, my sister owed underpayment penalty even though she owed the IRS less than $1,000 of taxes, so the rule didn't apply.  why?

[VolvoGirl]

You should send in quarterly estimated payments for other income like interest.   If  you have a lot of other income or a big tax due then Turbo Tax should print out estimates for you to use (they are optional).

If you want to make estimated pre payments for next year go to.....

Federal Taxes or Personal (Home&Business version)
Other Tax Situations
Other Tax Forms
Form W-4 and Estimated Taxes - Click the Start or Update button

Say No to W4. When you get to the W4 and Estimated Taxes section, say you want to adjust your income to go though all the screens.

You can even owe the penalty if you are getting a refund for not paying in evenly during the year.   So pay the estimates and don't wait until you file to pay.

If you get a penalty on 1040 line 38, 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.

How to add form 2210 for Underpayment Penalty
https://ttlc.intuit.com/community/tax-payments/help/how-do-i-add-form-2210/00/25703

It's under

Federal tab or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button