2020 is my first full year of retirement, so my income was less than in previous years. I paid quarterly estimated taxes based on that income. However, in December, I did a Roth conversion which substantially increased my taxable income. I estimated the tax increase and paid it as a separate payment in early January 2021. Using Turbotax, I've learned that I owe a small amount of taxes (less than 5% of the total tax due) and it shows a small (less than $100) estimated tax penalty. The quarterly estimated taxes now reflect this much larger income, so they are significantly higher than if I hadn't done the Roth conversion.
Here are my questions:
1) For 2021 (and beyond), I plan to wait until December to see if another Roth conversion makes sense because there are a lot of unknowns between now and then. Since a conversion is a possibility, rather than a definite, should I pay the higher quarterly estimated taxes in 2021 or should I do what I did for 2020, and pay estimated tax on the expected retirement income each quarter and only pay the increase if the Roth conversion takes place in the fourth quarter?
2) I don't understand why I have an underpayment penalty. I'd prefer to do what makes sense to avoid this. I'm aware of the 2210 form, but it does sound like a lot of work, entering all your income by quarter.
3) If I understand correctly, I pay just the tax due (not the penalty) when I file my return. IRS bills me if it determines that I do owe a penalty. Is the correct?
I'd appreciate any advice. Thank you.
