annualized tax estimates creating questionable penalty

[popeye20]

Our income is not static so when annualizing we applied our 1st quarter  withholding to the 1st quarter and based on the tax tables that was more than adequate to cover 1st and 2nd quarter earnings. The annualized calculations multiply the 1st quarter earnings in such a way that the 1st quarter is taxed at a much higher rate of tax than is owed so it generates a penalty that is then compounded. We took our earnings and subtracted the entire standard deduction, as that is how it is shown on the annualized sheet, applying the deduction at the beginning of the year so that it should have offset any estimate deficiency or penalty. We made estimated payments in the 3rd and 4th quarter commensurate with our income and are showing that we overpaid by about 8% and are getting a refund. How can we remove the penalty that we shouldn’t owe? Deleting the form does not work as it calculates a larger penalty in the background by not properly applying our 1st quarter withholding.

[DavidS127]

The annualized approach may not be the best way to calculate whether you have an underpayment penalty. 

Go back through the underpayment penalty section of TurboTax, and make sure you have entered the 2018 tax liability and 2018 adjusted gross income correctly.  Then, choose to not use the annualized method.

Note also that the boxes on the annualized method are a little tricky, and that each period asks for all income earned from the beginning of the year up to that point in time in the year.

[popeye20]

Thanks but our penalty would be higher if we did not annualize. When annualizing I added the quarterly income totals cumulatively by including the prior quarters income to the subsequent quarters – so that was done correctly. What the form is doing is taking our first quarter income and multiplying it by 4 crediting the standard deduction against this amount then taxing us as if this (first quarter times 4) amount was static throughout the year and is taxing us at 22%. The form divides the year’s tax owed by 4 and uses this amount to determine a penalty. If I take our actual combined income for the 1st and 2nd quarters apply the standard deduction we would be at 12% on the tax tables and our 1st quarter withholding covers the taxes that we would owe. The penalty is being generated because our 1st quarter earnings were much higher than the second.  If our 1st and 2nd quarter earnings were reversed we reduce the penalty, but the 2nd quarter estimated payment required is disproportionately high to the amount of income and still generates a penalty. 

[jes269]

I was FINALLY able to figure out how TurboTax was calculating my AGI by examining the draft Form 1040 in my draft tax return. First, navigate to the Turbotax Print Center. Then, download your draft return. Finally, look at lines 1-11 to see how TurboTax is breaking down your AGI. This helped me determine what income was and was not being counted, plus what my adjustments were. Hallelujah!