Do I have to pay penalties on a large Roth conversion executed in July 2025 if I pay estimated taxes in 2 quarters September 2025 and January 2026?

[Bsch4477]

Not if your payments cover your tax liability. 

[fanfare]

It is not sufficient to meet your tax.

Since you missed the first two payment dates, you may be penalized by the default calculation.

See Form 2210 Schedule AI for an opportunity to reduce or eliminate penalty based on when the income is received.

@martinmcarreno 

[AmeliesUncle]

As fanfare mentioned, to solidly confirm that you would not have a penalty you would need to pay the entire amount owed in September, not split between September and January.

With that being said, there are "safe harbors" the might reduce (or entirely avoid) the underpayment of estimated tax penalty, even if you don't make any Estimated Tax payments.

[baldietax]

To avoid penalty you need to have paid via withholding or timely estimated taxes (usually quarterly) 100% of your 2024 tax (110% if AGI > 150k or 75k if MFS) or 90% of your 2025 tax.

so the first thing to figure out is what are your safe harbor amounts based on 2024 and 2025; if you have a significant increase in income for 2025 you may still be better off paying quarterly ES based on 2024 tax with some penalty but deferring the rest of the tax owed on the Roth conversion until you file in April 2026, and earning 4% on that tax in the meantime to offset the penalty.  Whether you use 2024 or 2025, if you catch up the Q1+2 missed quarterly payments it will stop the penalty from accruing further and will only be penalized for a few months, then pay Q3 and Q4 as usual.

You cannot take the total ES due and split it now between Q3 and Q4 or you'll be underpaid in Q3 (75% is due by Q3 not 50% if paying quarterly), and the Annualized Income method won't work either as that expects the full amount of your ES due to the Roth conversion to be paid in Q3 not split between Q3 and Q4.  So that's probably the worst option in terms of penalties.

The other option if paying based on 2025 is to pay all the ES due from the Roth conversion in Q3 to line up with the income event and then file Form 2210 Annualized Income method which should reduce the penalty - whether it eliminates it entirely depends on how well the rest of your income lines up any withholding or estimated tax due.  How much you need to pay depends on what's happening with all your other income - you will need to calculate yourself a quarterly AGI, qualified divs, LTCG etc for 3/31, 5/31, 8/31 and ensure the Q3 ES meets the safe harbor amount for the tax due based on annualizing your 8/31 income, but please check Form 2210 for details.  This is input into TT under Other Tax Situations / Underpayment Penalty when you file for 2025, but note you have to do calculations offline yourself for this method and input figures into TT it won't know how to figure out your 8/31 AGI etc.

In conjunction with the above - if you are able to increase withholding for the rest of the year that is always considered timely and will reduce your total ES due and therefore the quarterly ES amounts and any penalties, tho only 5 months left for that to have an impact.

Not a CPA, hope this helps think thru your options, pls research accordingly - see https://www.irs.gov/pub/irs-pdf/i2210.pdf

[baldietax]

Just to clarify on the AI method where I said previously "full amount of your ES due to the Roth conversion to be paid in Q3" etc this may not be the case, depending your 2024 situation.  In the AI calculations, your ES requirements are still limited by your 2024 tax safe harbor (see Form 2210 AI Schedule lines 22-27) and the annualization of a large income spike in Q3 will likely exceed the 2024 safe harbor amount, so the most you need to pay in Q3 should be 75% of your 2024 safe harbor amount.

Re withholding, if you weren't planning to make ES payments without the Roth conversion, and your withholding meets your 2024 tax safe harbor amount, then this is the simplest scenario, you won't need to pay additional ES at all regardless of the Roth, and just pay the balance due in April 2026.

Hopefully you can take advantage of the 2024 safe harbor one way or another.  If it doesn't apply and you need to pay ES based on 90% of 2025 tax, I am not sure the exact math of the minimum you need to pay in Q3 vs. Q4,  other than the total ES paid by Q3 should be not be less than 75% of the total ES due for the year.

If you have TT desktop you can run a mock return for 2025 figures using 2024 software - granted the calcs will not take 2025 tax brackets/deductions and "big bill" changes into account - you can then input different estimated tax scenarios and check the penalty outcome in Forms mode, and run the AI method under Other Tax Situations / Underpayment Penalty.