If I did not receive the capital gain from selling a portion of my Traditional IRA in late Dec 2024, why do I owe a late payment penalty at all?

[Grumpster28]

Is there a way to dispute the penalty?

[ThomasM125]

I think you mean that you owe a penalty from owing taxes as a result of taking a distribution from your IRA.  You mention that there is a capital gain involved, but that would not affect the taxability of your traditional IRA withdrawal. Accept in rare cases when you take a complete withdrawal of all your IRA funds during the year, you simply pay ordinary income tax on all the money you withdraw from your IRA (from deducted contributions), regardless of whether there are capital gains or losses involved. This is so since you deducted your contributions to your traditional IRA, so any monies withdrawn will be taxed since they were deducted when you put them into the plan, or represent earnings on the monies contributed. 

You may be able to reduce the penalty for late payment of tax by using the underpayment penalties routine in the Other Tax Situations tab in TurboTax. You will see it under Additional Tax Payments:

[Grumpster28]

Thank you for the guidance but unfortunately, I could not find any way to dispute the underpayment charge in the Other Tax Situations / Underpayment penalty tab.

I apologize for the clumsy wording of my query and I will try to clarify my question.

I sold a portion of a mutual fund holding in my brokerage account (a non-IRA/Roth account) in late Dec triggering a capital gain which I knew would be tacked on to my ordinary income thus incurring a Federal tax payment due.  However, I believe it is a question of timing... since I did not owe any Federal tax for the entire year, until I sold my mutual fund holding in late Dec, why do I owe any underpayment penalty at all?

[ThomasM125 · Accepted solution]

You would need to pay the tax for income received in December by January 15 of 2025. That is the due date of tax for income received in the 4th quarter of 2024. 

If you owe more than $1,000 when you file your federal tax return, you will receive a penalty for late payment of tax under most circumstances, unless you paid the tax due before January 15 of the tax filing season. If you work through the underpayment penalties section in TurboTax I mentioned in the previous post, you will have an opportunity to enter your income earned by quarter that may reduce the penalty, as in your case you were apparently only late for the 4th quarter.     

The IRS will simply take your income for the whole year and divide it by four to determine your quarterly tax due. Since your late payment was only in the 4th quarter, their calculation will be higher than it should be. That is why you can reduce your penalty by completing the worksheet in TurboTax.