Federal Tax penalty for paying less tax

[goyal_raj]

Hi,

I see that Turbo tax is charging some penalty in my tax calculation as per the TAx summary sheet.

I had some unusual income this year because of employee stock options and I still paid approx advance tax. However, I was not aware of the net investment income tax which has been added to my tax payable.

But given that I paid more than 100% of the tax that I paid last year before Jan 15, 2021, should i be paying a penalty? IS this something that Turbo tax would do automatically and is there a way to avoid it as per the rules?

Thanks,

RG

[VolvoGirl]

If you do not pay enough tax, you may have to pay a penalty for underpayment of estimated tax. Even if you are getting a refund you can still owe a penalty for not paying in evenly during the year.  Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. It is included in your tax due or reduces your refund.

You might be able to eliminate it or at least reduce it.  You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you.  It's form 2210.

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

If you have the desktop program you can switch to Forms Mode (click forms in the upper right (left for Mac)) and open the 2210 form.  If the 2210 doesn't show up in the left column, click on Open Forms at the top of the left column.  Type 2210 in the search box and open the 2210 form.  Check box C to let the IRS calculate it.

[goyal_raj]

Thanks VolvoGirl.

I navigated to the penalty section under Turbo tax and it asked for all the withholding that I had paid in various quarters. However, that does not include the advance tax that i paid myself (no W-2 for it since it was an employee stock related gain).

It asked when i paid or will pay the balance. I entered an estimated date of 04/05/22 and it asked me if i would like IRS to waive the penalty and then an explanation. I am thinking of writing about this unexpected income and the net investment income tax which i was charged. Do you think this is fine or should i pay the penalty? 

I am not too keen to fill the form to let IRS calculate the penalty.

Any advice around this would help....

Thanks again,

[VolvoGirl]

You need to fill out everything and annualize your income and payments.  Which means adding up the income by each time period it wants, which can be tricky.  

Here is a blank 2210 form, see page 3

https://www.irs.gov/pub/irs-pdf/f2210.pdf 

And Instructions

https://www.irs.gov/pub/irs-pdf/i2210.pdf 

[Mike9241]

was your 2020 AGI over $150,000? then 100% is 110% per the tax laws.  if you paid estimates were they timely.   we can't see your return

you can always try the annualized income method to see if that lowers your penalty.

[goyal_raj]

Thanks Mike9241.

YEs my 2020 AGI was over 150k.

I am not clear on what you mean by "then 100% is 110% per the tax laws".

My estimates were not timely so a 2210 might not help.