Underpayment of taxes and/or Excess Advance Premium tax credit consecutively for 2-years - Tax due penalty consequences?

[skunche]

TurboTax uses AGI and Modified AGI to compute taxable income and Excess Advance Premium tax credit respectively. AGI and Modified AGI can differ especially due to Social Security benefits. When tax due results from "underestimation of AGI and underpayment of taxes" only or "underestimation of modified AGI and Excess Advance Premium tax credit" only consecutively for two years, I understand there will be a tax penalty with 2nd year taxes. In this particular situation, tax due results consecutively for two years because of the same trigger events.

However, there is a possibility that tax due may result consecutively for two years because of two separate trigger events. when tax due results from "underestimation of AGI and underpayment of taxes" only in one year and "underestimation of modified AGI and Excess Advance Premium tax credit" only in 2nd year (or vice versa), will there be tax penalty?

[JoannaB2]

Yes, a penalty may be assessed when you pay less than 90% of your tax liability during the tax year. The standard penalty is 3.398% of your underpayment, but it gets reduced slightly if you pay up before April 15.  If you received premium assistance through advance payments of the PTC in 2020, and the amount of advanced exceeded the amount of PTC you can take, you could be subject to a penalty for underpaying your estimated tax. 

[skunche]

Turbotax computed excess advance premium tax credit repayment alone ($0 from tax table) and no penalty for 2020 as I got a refund with 2019 taxes. However, I am very concerned about AGI (not modified AGI) estimation for 2021.

In addition to one year grace (or forgiveness) period, the percentile of underestimation of AGI or modified AGI probably matters for the assessment of tax penalty amount.  However, in my particular example, I am considering the possibility of underpayment of taxes for two years in a row consecutively; one year could be due to underestimation of AGI followed by modified AGI second year (or vice versa). Though triggering events are different (AGI verses modified AGI), does IRS consider both simply as under-reporting of income and penalize anyway with 2nd year taxes (assuming avoided penalty with 1st year taxes due to grace period availability)? 

[Cynthiad66]

Because of the American Rescue Plan you may be able to request and receive a waiver of the penalty.  If assessed, simply request a waiver directly from the IRS>

You may qualify for relief from penalties if you made an effort to comply with the requirements of the law, but were unable to meet your tax obligations, due to circumstances beyond your control.

If you received a notice, be sure to check that the information in your notice is correct. If you can resolve an issue in your notice, a penalty might not be applicable.

Penalties Eligible for Relief

Penalties eligible for penalty relief include:

• Failing to file a tax return
• Failing to pay on time
• Failing to deposit certain taxes as required
• Other penalties as applicable.

Types of Penalty Relief

The following types of penalty relief are offered by the IRS:

• Reasonable Cause
• Administrative Waiver and First Time Penalty Abatement
• Statutory Exception

Penalty Relief

[skunche]

I haven't yet filed my tax return for 2020. According to IRS website, Tax Day for individuals extended to May 17. 

I am in a dilemma whether to, (1) file the tax return with the excess advance premium tax credit repayment amount now and then send later an amended tax return for a refund, or (2) simply wait until extended tax deadline (May 17) for TurboTax to update the forms to include the changes in the American Rescue Plan. 

[BillM223]

We are waiting for guidance from the IRS on how to deal with all the collateral issues that forgiving the excess PTC repayment causes.

Part of the reason that the IRS extended most states to May 17th was to (1) give themselves time to come up with the guidance, and (2) give the software vendors time to implement and test the changes.

I can't make guarantees, but I would imagine that the change will be ready to go sooner than May 17th. 

I would suggest waiting for the updates and filing then, rather than expecting to go the amendment route, which can introduce additional complications.

[skunche]

Form 8962 still shows Excess Advance Premium Tax Credit Repayment amount on line 29. But No schedule 2 created and no amount is shown on Form 1040, line 17 or line 37. Federal Refund box now shows zero instead of  Excess Advance Premium Tax Credit Repayment amount. 

Does this mean TurboTax already has incorporated American Rescue Plan changes? 

[PattiF · Accepted solution]

Yes, TurboTax has incorporated the American Rescue Plan changes for the Excess Advance Premium Tax Credit Repayment.

[skunche]

This is good news.  Is IRS accepting e-filed tax returns now with the American Rescue Plan changes for the Excess Advance Premium Tax Credit Repayment?

Schedule 2 is no more generated. Then why does form 8962, line 29 still shows excess advance premium tax credit repayment amount?

[CatinaT1 · Accepted solution]

The amount of excess advanced premium tax credit is still calculated, but the repayment is not included on your return, only the form.  The IRS has to have some way of knowing how much they are forgiving based on this provision.