Underpayment penalty- how is it calculated

[goyal_raj]

Hi,

I see that Turbo tax has calculated an underpayment penalty of 29 for me for 2025 for my state return. But i cant see how it was calculated. I had paid an advance tax when i got a lump sum payment during the year. Infact, Turbo tax shows me a state refund after the tax calculation. How would i have underpaid if i see a refund and how can i get rid of this underpayment?

Thanks,

[Mike9241]

Name the state, so further help can be provided specific to that state 

The default for most states is that 1/4 of the required tax payments for the year must be made each period. Withholding is assumed to occur evenly throughout the year. Estimates only count in the period when made. 

Thus, with uneven payments, the annualized income installment method must be used if the state allows that method or whatever alternative they offer.

hence, it's possible to owe a penalty even when getting a refund. 

[goyal_raj]

Thanks.

The state is North Carolina.

I get a nearly fixed salary every month and tax is withheld from it every month, so I am not sure where the underpayment comes from.

How can I see the calculation in Turbo tax (is there a form/calculation sheet) and how can i amend/remove it if it does not make sense?

[Vanessa A]

Are you using the online or desktop version?  If you are using the desktop version, you can just switch to forms mode to look for form D422 which is the underpayment penalty worksheet for North Carolina.  If you are using the online version, you can go to the print center and then select all forms and you should be able to see your form D-422. You can also find the underpayment penalty and interest screen by walking through the state interview questions. Here you should be able to edit the numbers.  Be sure that if you are editing the numbers that you are correct in editing them.  

Another way you can see this is by going to the start of the state interview.  There should be a screen that tells you your taxable income, tax withheld and tax liability.  If this does not look correct, you can go back to the federal income section and select Income>>Wages>>W-2 and double check the entries in your W-2 box 15-17.  Be sure that you have commas and periods in the correct spot as well as making sure the numbers are correct. 

The only place you can change your taxes withheld is in the W-2 section.

If the numbers are correct and you simply did not have enough withheld, you would need to make changes with your employer and how much they are withholding.   The tax rate for 2025 was 4.25%.  

North Carolina State Income Tax in 2025: A Guide

 

[goyal_raj]

Thanks Vanessa.

The numbers on my W2 and in Turbo tax are correct. My withholding is also correct based on the salary i receive. The issue it seems is that i received a one time payment from my company for partnership (got a K-1 form) and that was in 3rd quarter i think. I paid the advance tax for that amount before the due date for that quarter. So technically, i was never short on tax paid/withheld.

However, when i look at the form D422, it compares the total tax payable for the year and the tax withheld by my company for the first two quarters and because of that one time payment the average tax withheld that it expects in each quarter is higher, so it calculates an underpayment. In reality i did not know that i would receive this one time payment, so no advance tax could have been paid/withheld.

In form D422, the numbers are as under (not real numbers):

Line 1- Tax- 10000

Line 2- 0

Line 3- 10000

Line 4- 9000 (Line 3 multiplied by 0.9)

Line 5 - Tax withheld- 6000

Line 6 - 4000 (line 3 minus line 5)

Line 7-    7000 (2024 income tax)

Line 8- 7000

and then a lot of calculation under the Part 3- regular method.

Turbo tax gives me an option to do the calculation quarterly by entering income from each quarter. Would that ignore the 2024 tax paid or the average per quarter calculation and calculate based on 2025 income in that specific quarter? 

Else, what can i change on form D422 to make the penalty zero? I do see Section B on D422 has no numbers for line 25 and 26 and just shows the penalty on line 27.

Thanks again.

[DavidD66]

You have already identified the issue.  Now you need to "annualize" your income, or accept the "option to do the calculation quarterly by entering income from each quarter".  That will match your one time Q-3 income with the Q-3 payment you made.  If you don't annualize your income and report income and payments by quarter, the IRS, the states, and TurboTax assume your income and tax payments were made pro rata in equal amounts each quarter.  And as you pointed out, the tax payments in Q1 and Q2 weren't enough to cover a portion of the Q-3 one time income. 

[goyal_raj]

Thanks DavidD66. 

I see that TT is asking me to annualize and report numbers per quarter. But it asks me for Federal AGI, NC additions/deductions and itemized deductions. All I have are my pay slips. Any idea how i can calculate my AGI deductions etc per quarter? I can follow the same formula as for the yearly AGI but it can be complicated to calculate per quarter.

thanks

[RobertB4444]

When you're calculating deductions and such per quarter most things just get divided by 4.  Anything that you are spending money on regularly does, anyway.  But if you pay all of your life insurance in January then that deduction goes in quarter one, and so on.

In your case the deductions aren't really that important.  You can spread them out evenly.  The income is the big deal and you want to make sure that shows that it was primarily the 3rd quarter that need ed the payment.

[goyal_raj]

Hi,

I just noticed that i have an underpayment penalty for my Federal tax as well but Turbo tax did not point that out or ask me to report quarterly income. What can i do to remove that penalty from Federal tax? where can i see the calculation?

Reporting quarterly income for state would also impact Federal penalty?

thanks

[RobertB4444]

No, you'll need to annualize your income for the federal return as well.  

In your federal return go to 'Other Tax Situations' and scroll down to 'Additional Taxes' and then click start next to 'Underpayment Penalties'.  Then you'll need to go through all of the same steps that you did for the state return.

[goyal_raj]

Thanks RobertB4444. I could find the place where to annualize. However, it needs a lot of info in addition to annualizing the income and some times it is hard to get, specially the taxes, QBI, itemized deductions etc. While i could manage the rest, I am stuck with annualizing itemized deductions. On the form Schedule A Itemized deductions i see some numbers and i am not sure where they come from. Here are some where i am having an issue understanding the calculation:

Section: Taxes you Paid

Line 5a- State and Local taxes - it shows a number which is more than the state tax i paid but there may be other things hidden there. How is this number calculated?

Line 5b - State and local real estate taxes- this is my property tax

Line 5c- State and local personal property taxes. I am not sure where this number comes from. I have not entered any property tax on my cars yet.

Would appreciate if you can help me decipher these numbers.

thanks again,

[BillM223]

If you are using the TurboTax Desktop product (it sounds like you are), then you can go into Forms mode (upper right) and go to a form and right-mouse click on most any field that has a number in it. This should expose a number of options, one of which is "Data source".

Click on Data source, and a box should open which will describe where this number comes from.