Underpayment Penalty Miscalculation

Forum|Forum|6 years ago
March 12, 2020
2 replies
23 views

We converted a traditional IRA to a Roth IRA in late December 2019. Within a week, on 1/2/2020, we submitted an estimated tax payment to the IRS to cover any concern regarding underpayment i.e. we made sure the taxes we owed were well under $1000. We entered the payment to the IRS into TurboTax Premier under Estimated Tax Payments for the 4th quarter of 2019. Premier shows we owe a penalty of $16 for underpayment. It's like TurboTax calculated a penalty for the first three quarters as though we could predict at the beginning of the year that we would convert an IRA at the end of the year. We made a more than adequate payment within 1 week of incurring the additional income tax. How can this miscalculation be corrected?

SteamTrain

Level 15

Not really a miscalculation...it's the primary default calculation that is used by both TTX and the IRS. Yes, the default assumes the $$ were received evenly over the year, and the estimated payment made in Jan of 2020.

The default calculation eliminates a lot penalties for a lot of folks, without forcing people to go thru more complex, optional calculations...but not in your situation.

You can eliminate that penalty, but for $16, I would suggest you just leave it alone. (It's a pain)

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Eliminating the penalty, can be done by going thru the "Annualized" income calculations that requires you to specify all your income, withholding, tax payments.....everything broken up by "quarters" (3mo, 2mo, 3mo, 4mo). Doing this requires gathering meticulous monthly records of all your income, and tax withholding and any other tax payements for the entire year

In the Federal taxes section, in the "Other Tax Situations" tab, there is a menu item for "Underpayment Penalties"....you can go in there and start the Annualized Income calculations to potentially eliminate that $16 penalty.

IF you are using the Desktop software, I'd do a "Save-AS" of your tax file to another named file, and try it out as a test there, before deciding to wade thru it on the real tax file you want to submit. IF you are using the Online software, you don't have that test option.

____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*