Roth conversion tax penality

[dlcnws]

I made an IRA conversion to a Roth IRA in December 2019 and paid the estimated tax the same day. TT is showing I will owe a penalty.  Am I missing something? Is there a place to enter the date of conversion and date the estimated tax was paid.  Estimated tax more than covers my tax bill and am getting a small refund.

[dmertz]

Are you seeing an underpayment penalty (Form 1040 line 24) or an early-distribution penalty (Schedule 2 line 6)?

If the penalty is an underpayment penalty, you might need to annualize income, deductions and credits to reduce or eliminate the underpayment penalty, particularly if the conversion was done late in the year.

If you are seeing an early-distribution penalty on the amount converted to Roth, you've entered it incorrectly.  What is the code in box 7 of the form 1099-R?  Is the IRA/SEP/SIMPLE box marked?  Was the entire amount in box 1 converted to Roth?

[dlcnws]

Hi dmertz,

I'm seeing the under payment penalty Line 24.  I don't understand this one.  I made the conversion and immediately made an estimated payment that covers the additional tax from converting.  The conversion was done in December.  Not sure what you mean by needing to annualize income, deductions and credits.  Are you saying make quarterly estimated payments?  I did that when the conversion was made.

[dmertz · Accepted solution]

By default, income is treated as received equally throughout the year but estimated tax payments are credited for the tax quarter in which they are paid.  Because your conversion is being treated by default as having been received partially in each of the four tax quarters, you have underpayments for the earlier quarters.  To treat the income resulting from the Roth conversion as having been received all in Q4 your tax return must include Schedule AI of Form 2210 (which TurboTax refers to as Form 2210AI) to allocate all of your income, tax withholding, estimated tax payments and any tax credits to the particular tax quarters to which they correspond.  This is a rather onerous task.  In this case your Roth conversion and the estimated tax payment would both be allocated to Q4, but you'll need to go through your personal records to determine the quarters to which to allocate other amounts.

When TurboTax indicates that you have an underpayment penalty, TurboTax will ask if you want to annualize.  Answer Yes to go through the process.

[dlcnws]

Thanks, dmertz.  I'll check it over.