I Paid Estimated Taxes But Still Have An Underpayment Penalty

[SyberKnight]

i paid 2 estimated tax payments using the amounts TurboTax provided last year. i entered those payments in this year, yet there's still an underpayment penalty amount being deducted that i can't change. what am i missing? thx.

[DianeW777]

An underpayment penalty can exist even when there might be a refund. The IRS system is pay as you go, which means when you make money they want the tax dollar, so if the estimated payments were not enough in the required periods you may still have a penalty.

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.

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 2024 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.

[Mike9241]

there are generally 4 estimated tax payments 4/15, 6/15,9/15 ans 1/15 of the next year.  So it would seem you for some reason 2 were not made

[baldietax]

IRS assumes your income and any withholding is even throughout the year (literally total divided by 4), and any estimated tax needed to meet the "safe harbor" (100/110% of prior year tax or 90% of current year tax) also needs to be paid "timely" which usually means quarterly.  If you only paid 2 of those ES payments you will likely be underpaid on the 2 other quarters.

If you are on desktop you can see Form 2210 in Forms mode (double click on Form 1040 thru Line 38 and again in the 1040 worksheet, or use Open Form) to show the quarterly underpayment (not sure equivalent for TT Online as Form 2210 is not filed by default unless you have an exception condition).

Depending the actual timing of your income and when you paid the ES you may be able to reduce the penalty with the AI method, but it involves a lot of additional calculations to detmerine your AGI, withholding, qualified divs, LTCG by quarter.  The AI method is helpful if your income was uneven towards the end of the year (e.g. Q4 Roth conversion) and your ES payments were also late to show IRS how they line up.  But if your income was generally even then the AI method won't solve for ES payments that were simply missing or late.

[SyberKnight]

thank you all for your replies. good info to have. at this point, i'm wanting "easy", so will live with the penalty & just try to do better this year. i didn't realize i had to make 4 payments, one for each quarter of the year. i thought if i just paid some, that that would take care of the penalty for nonpayment.