Miscalculated estimated tax penalty

[pdb430]

Received letter from IRS....,' you miscalculated estimated tax penalty...' including check for THE FULL AMOUNT TTX CALCULATED AS THE PENALTY. Therefore, no penalty was due, but TTX added a penalty.  It further says'... in a disaster area, addition time...may be granted...' I did not apply for any disaster allowance although we are in a recognized 'disaster area'. 

Is that why the penalty was refunded?

Significant income is reported from RMD accounts. I understand that greatly affects, and may eliminate, estimated tax penalties. How do I know which it is, and how to approach estimated tax payments in 2025?

Thanks

[baldietax]

not sure about any disaster area aspect I think that just affects time to file not amount/penalty

TT calculates the penalty on form 2210 using the information it's been given for 2023 AGI/Tax (carried over from 2023 or input), 2024 tax/withholding, and estimated tax payment amounts/dates input into TT.  If you are on desktop you can double-click in forms mode thru penalty line on Form 1040 line 38 and again on the worksheet to bring up the Form 2210 calculations; for TT Online version it may be in the PDF with "all forms and worksheets".

IRS recalculates the penalty using the same form/calculation, but its own data in the IRS system for your 2023 or estimated tax payments, it's possible they had different information or some adjustment had occurred that TT did not have in the calculation.

For 2024, to avoid underpayment penalty you need to have paid during the year thru either withholding or "timely" (usually quarterly) estimated tax payments, the smaller of either - 100% of your 2023 tax (110% if AGI > 150k), or 90% of your 2024 tax.  This is the 'safe harbor' amount.

So for example if you didn't have the correct 2023 AGI/Tax info and TT determined that your safe harbor was based on 90% of 2024, but IRS used 2023 and figured that 100% of 2023 was smaller, and you paid enough tax to meet it then you would not have a penalty.  Or if you paid ES but didn't input them into TT with the correct dates, IRS will have a different calculation.  This is just a guess but I think the best thing to do is to try and find the penalty calcs in TT 2024 to see if there is anything obvious error in the data causing TT would calculate a penalty.  You can also do your own calculation based on Form 2210 and your 2023/2024 info.

As for 2025, the same process applies, you need to have paid the smaller of 100/110% of your 2024 tax, or 90% of your 2025 tax.  So it depends on your circumstances, for example if you expect a higher tax liability in 2025 then you can pay "timely" estimated tax quarterly based on 2024 since everything is known, and it doesn't matter what happens in 2025 you will not get a penalty.  By "timely" - you need to pay the estimated tax evenly and quarterly, by default the assumption is your income is earned evenly thru the year, withholding is also applied evenly regardless of when it is withheld, but ES need to align with specific quarters ("pay as you go"), and the penalty calculation is assessed quarterly.  You can pay the full amount by year-end or even have a refund but still have a penalty for Q1 say.  If you do need to pay ES, given it's now May and passed the Q1 ES deadline you may end up with some small penalty for underpayment in Q1 but the interest will only be a for a few months if you pay Q1+Q2 in June for Q2 ES it will stop accruing penalty interest for Q1.

If you decide to use "90% of 2025" then you need to come up with a process to estimate that, but if you do have some large unplanned income event like a Roth conversion or large cap gain you can also file using the "Annualized Income" method to show uneven timing of income and ES payments.

More on ES can be found here https://www.irs.gov/faqs/estimated-tax

More on Form 2210 here https://www.irs.gov/pub/irs-pdf/i2210.pdf

Not a CPA but just my few cents on this topic based on what you described, hope this helps.

[baldietax]

just to add when you did you 2024 tax, TT would have generated vouchers for 2025 ES.  It does this by default using "100/110% of 2024 tax" as the safe harbor and assuming your 2025 withholding will be the same as 2024.  The difference is the ES payments, divided into 4.  On TT desktop you can see this in forms mode under "Est Tax Options" form.  The only downside of this method is you could end up overpaying estimated tax or tax in general, if 90% of 2025 is much smaller (especially if you hit the 110% of 2024 requirement for high income), which you could be earning interest on.

Under "Other Tax Situations" / "Form W4 and Estimated Taxes" you can provide estimates for 2025 to see if "90% of 2025" requires less estimated tax, with the caveat you have to keep track of your estimate to ensure you meet 90% of the tax thru this method.

[HollyP]

Yes, being in a federally declared disaster area can automatically waive your penalty. 

Page 2 of the Instructions for Form 2210, states: 

Federally declared disaster. Certain estimated tax payment deadlines for taxpayers who reside or have a business in a federally declared disaster area are postponed for a period during and after the disaster. During the processing of your tax return, the IRS automatically identifies taxpayers located in a covered disaster area (by county or parish) and applies the appropriate penalty relief. Don't file Form 2210 if your underpayment was due to a federally declared disaster. If you still owe a penalty after the automatic waiver is applied, the IRS will send you a bill