Estimated Prepayment Penalty

[hmkacz]

We make estimated quarterly payments based on dividend income. In the 4th quarter, we sold stock for a capital gain and made a higher 4th quarter estimate. We filed our taxes through TurboTax and they said we had no penalty. Now, two months later, we get a letter from the Indiana government saying we owe $27 penalty. The amount is no big deal, but I'm not understanding why TurboTax didn't calculate this? My research shows it may have to do with the timing of the payments and we possibly should have filed IT 2210, however, when we go back into our taxes, it just keeps saying no penalty is owed. I want to understand how to deal with this to prevent the same problem in the future. 

[Mike9241]

The default method that the IRS and TurboTax use is that 1/4 of the required tax payments are made each period based on 1 of 2 safe harbors. 1) 22.5% of the current year tax is paid in or withheld each period, or 2) 25%  to 27.5% of your prior year tax is paid or withheld each period. You probably did not meet either safe harbor, so what you need to do is to prepare Form 2210 using the annualized installment method on page 3 and follow the notice instructions for contesting the findings. There is no guarantee that this will entirely eliminate the penalties. 

This probably requires filing an amended return with the only required form the 2210. You can complete this in TurboTax under - other tax situations > additional tax payments > underpayment penalties. 

[SteamTrain]

@hmkacz   

Yeah, normally TTX will tell you if you have a penalty and offer you the option to fill out the detailed exceptions form, but that can depend on certain summary information you may have entered about the prior year's taxes, and whether that 2024 Indiana tax information was correct.   

Finding the "IT 2210" for Indiana, would be in the last section for the Indiana section interview, also under a section probably listed as something like "Other tax situations"  (But I don't have Indiana software, so it may be labelled somewhat differently).   There would be questions about doing the underpayment penalty interview and that interview triggers the IT-2210, but I don't know if it can be forced if the TTX software thinks you don't owe a penalty to Indiana.

Yep, filling in the detailed data needed for any 2210 type of form (Federal or State) is a PITA, and not worth bothering with for a $27 penalty, though everyone's trigger point for accepting such a penalty fee can be different.