No underpayment penalty on california state tax return

[ankit312]

Based on California tax board website, if tax underpayment due amount is more than 500$, there will be 5% penalty on due amount.  However, when I created my california state return using turbotax it is not generating any penalty. Without this penalty tab, I can not use annualized income installment method. So there is no way to pay or reduce penalty in system. I can see that system has generate FTB 5805 form but it is blank and I can not edit manually. 

I think there is a bug in software. How do I report it?

I have created diagnosis file. 

[KeshaH]

Even if you owe $500, you're not penalized if you paid in at least 90% of the current year's tax liability or 100% of last year's tax liability. If you didn't file a CA tax return last year, you would also not be penalized for filing.

If you believe you should still be assessed a penalty, make sure you haven't elected to have CA FTB calculate the penalty for you. See the screenshot below.

[ankit312]

This was more information regarding my state taxes:

For 2023,

1. State tax withhold : ~67K
2. State tax for income : ~46K
3. State tax return after filing taxes : ~21K 

For 2024,

      4. State tax withhold : ~49K

      5. State tax for income : ~105K

      6. State tax underpaid and need to pay after filing taxes : ~56K 

 Based on above,

Since #4 is less than 90% of 2024 tax liability (#5 )and #6 is more than 110% of 2023 tax liability #2. 

I did not even get screen you have posted. If I have seen that screen, I would have marked "No" and inserted Annualized income installment method to reduce the penalty.  That is why I think there is some issue with software. Based on tax liability i should be paying penalty unless I am missing something. Worse case FTB will send notice for penalty but at that moment I will not be able to do annualized income method and they might charge interest as well. 

[MonikaK1]

In the California return, the Underpayment Penalty questionnaire normally doesn't appear unless TurboTax has tentatively calculated a penalty based on the income and payment information you entered. There are several exemptions to the penalty and you may have met one of the other exceptions.

If TurboTax calculates a penalty, you will see Underpayment Penalty listed as an item under Other Situations and you may also see a screen prompt before you get to the end of the California items asking if you want to go over the penalty section now. Respond "yes" to "Would you like to review this topic?". If yes, you are given the choice to let the Franchise Tax Board calculate the penalty and send you a bill, or complete the questionnaire.

See this FTB webpage for more information about California penalties.

According to the form, If you qualify for the 110% of 2023 exemption, or another exemptions, then the Form 5805 is not required to be submitted.

Form 5805 states:

IMPORTANT: In most cases, the Franchise Tax Board (FTB) can figure the penalty for you and you do not have to complete this form. See General Information B. If you meet any of the following conditions, you do not owe a penalty for underpayment of estimated tax. 

Do not complete or file this form if: 

• The amount of your tax liability (not including tax on lump-sum distributions and accumulation distribution of trusts) less credits (including the withholding credit) but not including estimated tax payments for either 2023 or 2024 was less than $500 (or less than $250 if married/RDP filing a separate return). 

• Your 2023 return was for a full 12 months (or would have been if you were required to file) and you did not have any tax liability on that return. 

• The amount of your withholding plus your estimated tax payments, if paid in the required installments, is at least 90% of the tax shown on your 2024 return or 100% of the tax shown on your 2023 return (110% if California adjusted gross income (AGI) was more than $150,000 or $75,000 if married/RDP filing a separate return) and you are not using the annualized income installment method. Taxpayers with California AGI equal to or greater than $1,000,000 (or $500,000 if married/RDP filing a separate return) must use the tax shown on their 2022 tax return if they do not meet one of the two conditions above.

@ankit312 

[ankit312]

Hi @MonikaK1 ,

Thank you for response.

I am still confused about what is considered to be tax liability. For my 2023 tax liability, would be #2 or #3 below?

For 2023,

1. State tax withhold : ~67K
2. State tax for income : ~46K
3. State tax return after filing taxes : ~ -21K 

For 2024,

      4. State tax withhold : ~49K

      5. State tax for income : ~105K

      6. State tax underpaid and need to pay after filing taxes : ~56K 

Based on your suggestion I checked my 5805 form and found that it is marked as previous year $500 rule exception. So, I think it is based on my 2023 tax liability were 46K -67K(#3 above, less than 500). Shouldn't it be based on #2 above ?

Also, based on FTB 5805 form instruction "Taxpayers with California adjusted gross income (AGI) equal to or greater than $1,000,000 (or $500,000 if married/RDP filing separately) must use the tax on their 2024 tax return to figure their penalty if they are subject to the underpayment of estimated tax penalty."

Since my AGI for California for 2024 is 1M, it should not be looking at 2023 tax year and only rely on 2024 tax return. 

Let me know if my above understanding is incorrect. 

I understand that FTB might send notice for penalty if they think it is needed. But issue is, I will not be able to do annualized income installment method at that time. If it would have been during tax filing I could have done annualized income installment method to reduce penalty.