What does "I am suddenly being hit with an....underpayment penalty" mean? Are you still preparing your tax return and TurboTax (TT) is telling you this or did you get an actual IRS notice, after filing your tax return?
If you owe $1000 or more at tax time, you may be subject to an underpayment penalty. The most likely reason is you did not have enough tax withheld from your pay and pension. It's neither the IRS or TT's job to somehow let you know that ahead of time. That's your responsibility. They can only let you know after the fact.
You should pay in quarterly estimated taxes if you don't have enough withholding taken out to cover the tax on all your income. You might be able to increase your W2 withholding, at your regular job, to account for the extra income.
You should make estimated tax payments for the current tax year if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.
- 2. You expect your withholding and credits to be less than the smaller of: 90% of the tax to be shown on your current year’s tax return, or 100% of the tax shown on your prior year’s tax return. (110% if your AGI was more than $150K) . Your prior year tax return must cover all 12 months.
TurboTax (TT) can prepare the quarterly payment vouchers. In your 2020 software, enter at:
Federal Taxes or Personal (H&B version)
-Other Tax Situations
-Other Tax Forms
-Form W-4 and Estimated Taxes - Click the Start or Update button
On the next screen answer No to the W-4 question
If your goal is just to avoid the underpayment penalty, then paying 100% of the prior year tax liability is the “safe haven”
