North Carolina underpayment interest calculated even when I get a refund for overpayment.

[zzyzx7105]

I decided to do a Roth IRA conversion in December and I wanted the tax withholding to be paid from another account. On the same day I made the transfers from my IRA to my Roth IRA, I made a North Carolina Estimated Tax Payment to cover the taxes owed from the transfer taken out of a taxable retirement account. TurboTax is saying that I didn't withhold enough money and I owe interest on my underpayment even though I have a substantial overpayment. TurboTax shows that my withholding and my estimated tax payment together cover the taxes owed.  What's up?

[SteamTrain · Accepted solution]

@zzyzx7105 

You need to go thru the "Underpayment Interest " calculations in the "Other Situations" section in the NC tax return.

The problem is that the conversion date isn't a part of the form where you made the conversion to Roth...so the initial "Default" calculation that is automatically done at first...assumes the $$ were distributed evenly over the year.   Going thru the "Underpayment Interest" section, you can delineate exactly when you "received" all your sources of incoem during the year, and also exactly when you made your withholding and estimated payments.  It is a bit of a pain to do, so I wouldn't bother if the penalty/interest is less than $50 or so, but that's up to you.

As an Example:  The reason that penalty is initially set that way, is to keep people from getting a big income dump in (say) January, but then not paying the estimated tax until December.....even if it is a huge refund...the estimated payment would have been due in the 1st quarter.

The Underpayment Interest section calculations let you clear up when the income bump really occurred, and when you actually paid for it.

[zzyzx7105]

Thanks, I found the section you mentioned. But it was kind of late for me because I had already submitted my return by the time I read your message. We were only talking about $18, but I put it in my notes for next year in case I do another Roth Conversion.  Thanks again for your response it will be helpful for next year at least.