Estimated Taxes Underpayment Penalty with Simultaneous Refund

[CG03]

Well, this appears to be a popular topic.

I'm at the "Other" section of the tax form, and it claims I have an estimated taxes underpayment penalty, while I'm also getting a refund many times greater than the penalty.  🤔  Every year, I adjust my final estimated tax payment if investment distributions are greater than predicted (which distribute at the end of the year), specifically to avoid an underpayment penalty and the pain of annualizing income.  For the initial estimated tax computation, I calculate and pay based on 100% of the coming year's income (using regression analysis).

I don't understand...

[DianeW777]

It is possible to have a refund and still have an underpayment penalty if the payments were not paid equally across all payment dates. If your income calculation was used each period to determine if an estimated tax was required, then you may need to do the annualized method to reduce or eliminate the penalty.

The IRS is a pay as you go system which means when the money is earned the tax is due.

You can choose to use the annualized income/tax method in TurboTax by using the steps below. Have  your 2025 return ready just to confirm your numbers.

1. Open your  TurboTax Online or TurboTax Desktop return
2. Search (upper right) > Type underpayment penalty 
   1. TurboTax Online: Click 'See More' at the bottom of the FAQ that pops up > Click on Go to annualizing your tax
   2. TurboTax Desktop:  Click the Jump to.. link
3. Continue selecting to use the annualized method and enter the income in the slots where earned.  For wages, interest, dividends or anything earned equally through out the year divide by 12 and multiply by 3/5/8. 
4. Continue to follow the screen prompts

Generally, you can avoid the penalty if your total timely estimated payments and withholdings are greater than or equal to the lesser of:

• 90% of the total tax after credits for the current year, or
• 100% of the total tax after credits in the prior year
• See one exception below.

You can also avoid the penalty if the amount you owe is less than $1,000 as long as any estimated tax payments you made are timely.

Note: High-income taxpayers. If your adjusted gross income (line 11 of your 2023 Form 1040) is greater than $150,000 (or $75,000 if you're married and file a separate return from your spouse), you can avoid a penalty by paying at least 110% of your total tax from the prior year.

[baldietax]

if you are on desktop go to Forms mode, open Form 2210 (by default it may not be shown in your return forms lists until you select the AI method), and it will show the safe harbor calculation and allocation by quarter to see where the underpayment arose earlier in the year, there should be a form with the penalty calculation also.  Not sure equivalent for online but it should be in the PDF with all forms and worksheets.

if you start out with intent to cover 100% of your tax but end up having to adjust ES higher in later quarters to meet the safe harbor, then you'll end up with an underpayment from earlier quarters (even if you overpay and end up with a refund).

if your income is steady it may be simpler to pay estimated tax based on 100/110% of prior year tax which is fixed amount but could be an overpayment especially if you're in the 110% category.

[CG03]

Thanks for the reminder about the 110%.  It had not been an issue for the last 10 years or so using the regression analysis (capital gain swings can be large and otherwise unpredictable, so I constructed the linear trend making sure it was always larger than the previous year, although that did not always happen).

The estimate for 2025 ended up being just 104% of tha actual from 2024.  But even at 110% it wouldn't have met the $150,000 threshold.  My 2025 vs 2024 estimated incomes ended up being 118%, but in actuality 2024 went lower and 2025 went higher.  Guess I'll adopt a conditional to use the regression or 110%, whichever is higher.

Now I have to decide if I want to annualize for $7. 😁

[baldietax]

ha - excellent - I'd definitely pay the $7 to avoid 2210AI lol.