Underpayment Penalties - Retired living off taxable and ira investments. Pay quarterly taxes based on quarter income. Big Q4 due to Roth conversions. Why penalty?

[gregorydjones]

IRS is "pay as you go".  I take IRA distributions quarterly (income) and pay appropriate estimated tax on time.  This year Q4 I completed large Roth conversion and paid substantial tax early Jan. 2022.  Current federal form shows "refund" and TurboTax claims I owe a penalty.  I see nothing in IRS rules suggesting a penalty.  Help?

[SteamTrain]

The  "default" penalty calculation does not know that the income was just in the 4th Qtr, and the "default assumes the $$ were received evenly over the year...thus the default calculation appears to show you underpaid taxes in some or all of the first 3 quarters of the year.

This default calculation, many times (a guess,75% of them), ends up showing no penalty, and thus no extra work for either the IRS or the taxpayer....but in your situation, that 4th Qtr conversion did exceeds what the default calculation deals with.

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 After you've filled in most everything, check what the actual penalty is (line 38 of the form 1040). If $50 or less, and your tolerance for paying the extra is sufficient,  then ignore it and just file as-is, paying the penalty.

IF your tolerance for paying extra is low, then you'll have to go thru the more rigorous "Annualized Income" process  (on the "other Tax Situations" page)....doing this, the form 2210 AI is filled out where you show ALL your income by quarter, and all payments and withholding by quarter...thus showing the big jump in income, and its payment were properly done in the 4th quarter. 

...............But be forewarned, you need all your monthly statements detailing all interest, dividends, capital gains, Mutual fund distributions, pension payments, withholding, Estimated Quarterly payments, etc, so that you can total them by quarter (strangely, 3mos, 2mos, 3mos, 4  mos).  Its a fair amount of work, and a spreadsheet helps.    (I've done it once, and will just pay the penalty if under $50 )

AND...the full forms 2210/2210AI that are needed aren't scheduled to be final until 24 February  (but that could change).

[gregorydjones]

Thank you for your quick response.  The penalty is several hundred dollars.  The IRS allows an option to have them calculate any penalty.  TurboTax automatically reduces a refund by the penalty amount.  Shouldn’t TurboTax include such an option?  I recall a similar situation last year that eventually went away, but caused me to significantly delay my filing.  Is there a way now to override the automatic penalty?

[SteamTrain]

@gregorydjones 

Yeah, but just because you let the IRS calculate it...they will still determine a penalty and bill you later   (possibly plus interest).  They will also just use the default calculation, because your 1099-R does not specify exactly when that income was generated.   

And if you think you can bypass this later by amending your tax return to include the form 2210AI in a couple months...that way lies madness....i.e.  the IRS will bill you, you'll amend...it will take months and months before the IRS gets around to your amended forms, meanwhile they are accruing interest for penalty you didn't pay (yet).....but eventually gets removed by the amended forms....some # of months later this year.

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Anyhow, I get to the Let the IRS Bill me section:

1) On the Federal  "Other Tax Situations" tab

2) Scroll down to, and expand the section titled "Additional Tax Payments"

3)  Start in at "Underpayment Penalties"

4) Step thru the startup there:

When you get to:

"Annualized Income"...select NO

"Actual Withholding" ...select NO

"Date of Payment"....skip...just hit Continue

"Penalties Waiver"......select NO

"Let the IRS Bill Me Later"   select "Let the IRS Bill Me Later"

[gom]

Hello DGJ,

I share your annoyance and frustation.  While I am not a tax expert, I do try to follow tax topics that are (or I anticipate being) relevant to my situation.   One of those topics is Estimated Taxes and since the last for 2021 was due Jan 15,  it would seem to me that your 'early Jan 2022' would/should have you covered.  However, 

I'm beginning  think turbo tax may not be adequately addressing the tax situations of retiring baby boomers and it may be time to try different software. 

Allow me to explain:

I, for one, have had it with having to go through those damndable penalty income calcs.  This is the 3rd year I have taken a traditional IRA distribution in December which include sufficient tax withholding to insure refunds of over $1000.  My understanding is that these taxes are suppose to allocted across 12 months  esliminating my need to submit estimated taxes.  However I haven't figured out how or if that allocation is actually occuring.  Since my monthly income doesn't vary much, it simply doesn't make sense that I should to complete those blasted penalty calcs.  

I'll update this thread if I learn anything further.  Thanks for the posting.