End of year Roth conversion now causing a large penalty?

[GL243]

I decided to do large ($108k) Roth IRA conversion just before the end of 2019, paid the estimated taxes due by the January 15 deadline, and now TurboTax is showing we owe $367 in penalties and interest on our 2019 return, which I speculate is because the system presumes we were supposed to have paid more estimated taxes quarterly earlier in the year.  That does not seem fair to me because we didn't know we were going to do the Roth conversion until the end of the year.  Is the penalty amount legitimate, or is this perhaps a glitch in the TurboTax software?

[SteamTrain · Accepted solution]

It is  kind-of legitimate, but you can clear it.

What I mean is that, Yes, the default calculation assumes you received the income evenly over the year and should have paid the taxes evenly too.    That "default" calculation clears a lot of people from a penalty (or a significant penalty) when the amounts are lower, or they overpaid some in earlier quarters.....and thus it eliminates a lot of paperwork for all involved...both taxpayers and the IRS...when the penalty doesn't happen, or is small when using the default calculation.  (IF the conversion & Estimated payment had been done the first quarter of 2019, the default calculation would have shown little or no penalty, since the big 1Q Estimated payment would indicate you overpaid taxes at least for the first 3 quarters )

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For those who see a significant penalty, that really shouldn't be the case (like you) there are additional forms you need to fill out to reduce or eliminate the penalty...The forms 2210/2210AI  (AI=Annualized Income). 

Those forms are available in the TTX software, and when you go thru them, you will indicate ALL your income, all your tax payments, deductions credits etc...by Quarter for 2019...thus showing that extra income as occurring in the last quarter, with the last estimated payment on-time.

To do this, you will need accurate records of every month's income. federal tax withholding, estimated payments, interest, dividends, capital gains from all accounts...etc... (A spreadsheet helps)...and the quarters are 3mo, 2mo, 3mo, 4mo (JanFebMar, AprMay, JunJulAug, SepOctNovDec)  .  And yes, it's a pain to do, unless you just shrug and take the penalty.

You would access the interview for those forms on the "Other Tax Situations" page in the "Additional Tax Payments" section and you "Start" at  "Underpayment Penalties" .   (For H&B, I would think that "Other Tax Situations"  is in the Personal taxes section. )

You might have to go thru that interview a few times ti get it right, and print out copies of your tax forms after each session...plan on spending a week on it...work on it one day, then print out the results and think about them for a day, then repeat to get the numbers right. 

BUT...don't even start working on that section until you have absolutely everything else done in Federal taxes section...or you'll drive yourself nuts redoing it when some income numbers (or something else) changes because you are still editing other sections.

[GL243]

Thanks very much for the quick response.  I will take a stab at it, and may actually have a spreadsheet put together pretty close to what you suggest.  Wish me luck . . .

[fanfare]

There must be an easier way. I think you can do this by quarters, not monthly.

Start with the applicable quarter when you converted and see if the penalty goes away.

[SteamTrain]

@fanfare 

...it is quarterly, but having monthly statements and monthly amounts will  help set up and total quarterly amounts. But each to their own.

And the software Interview for the 2210AI actually uses cumulative totals i.e.

1/1/2019-to-3/31/2019  then 1/1/2019-to-5/31/2019  etc.

[Carl]

In the search box enter UNDERPAYMENT PENALTY and click the search button. Wait a bit, then click the "jump to" link. Then you can work it through to show your income each quarter. When given the option to "annualize" your income, select YES that you want that option, and work it through. With a substantially higher figure for the fourth quarter combined with that fourth quarter estimated tax payment, that "should" eliminate the penalty if the tax payment was high enough.