Annual Installment Method for Large 4th quarter rollover to Roth IRA from traditional IRA

[user17611423359]

This week I transferred large dollar amount from traditional IRA to Roth IRA. Realize amount transferred taxed as ordinary income and I will make estimated tax payment for tax due. Minimal taxable income earlier this year, so want to reduce underpayment penalty incurred. Heard of Annualized Installment Income Method to reduce penalty. How/where do I use/select this annualized method in TurboTax. I believe I enter income amounts by quarter then, but is there section for income from Roth conversions? Also, is there ability to select annualized income method for Illinois tax returns too in turbo tax. Specific details on process will be greatly appreciated! Thanks so much!

[K M W · Accepted solution]

The IRS generally assumes that income is earned evenly over the year, so if you have significant taxable income in the last quarter of the year and paid a large estimated tax payment in the last quarter to cover that liability, your tax return could initially show a penalty for not paying in earlier in the year.

If your income is not received evenly (e.g., you're a seasonal business owner, or you received a large bonus or capital gain late in the year), you may be able to reduce or eliminate the penalty by using the Annualized Income Installment Method. You would used Form 2210 to allocate your income based on when it was actually received during the year, instead of the default of assuming it was earned evenly throughout the year.  

In TurboTax, you would navigate to Other Tax Situations, then find the section on Underpayment Penalties.  From there, you want to follow the prompts, and answer "yes" to the prompt "do you want to use the annualized method to reduce the penalties?"  From there, simply enter the data on the prompts to allocate your full year income based on actual receipt date.  TurboTax will then complete Form 2210 and file it with the tax return.

Illinois has a similar form, the IL-2210, which will also have you allocate your income based on when received if your income was not received evenly throughout the year in order to eliminate/minimize any penalties.