I will owe about $6000 in federal tax for 2020. The income is from IRA conversion, social security, and dividends. I neglected to make any quarterly estimated tax until now. I have scheduled a payment of $6500 for this quarter. How will the underpayment be calculated, when is it determined, and when do I pay? Can I just let the IRS notify me? If so, are they prompt?
How will the underpayment be calculated, when is it determined, and when do I pay? An estimated underpayment penalty is calculated by the program and paid with the return.
Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of 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.
If you decide to make an estimated tax payment for tax year 2020 it must be made on or before January 15, 2021. Go to this IRS website to make a tax payment - https://www.irs.gov/payments
If the penalty is calculated then ...
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.
Federal Taxes or Personal (for H&B version)
Other Tax Situations
Additional Tax Payments
Underpayment Penalties - Click the Start or update button
Can I just let the IRS notify me? After you file any underpayment penalty you have not yet calculated will be billed by the fed/state.
If so, are they prompt? Sometimes.
you can avoid penalty if
- you pay a sufficiently large estimated tax payment by Jan 15, and
- you check box C on Form 2210
Since you are paying your entire tax amount, that should be more than enough for the "sufficiently large" requirement
box C only works with a 4th quarter estimated tax payment if all income was earned in that qtr and the AI schedule is completed. the taxpayer indicated that their income came from various sources like social security and dividends so it's likely that they had income throughout the year. $6.000 in taxes would mean taxable income over $45,000
Actually the IRA conversions were made in the 3rd and 4th quarters. And those conversions represent a little over half of my taxable income.
The dividends too were more weighted in the 4th quarter.
So it sounds as though form 2210 will request this type of information and, in my case, lower the underpayment penalty. Correct?
"An estimated underpayment penalty is calculated by the program and paid with the return."
I have completed my tax return. How do I know if a penalty was calculated by the program? Is there a line on 1040 for this? Also, there is no form 2210 generated in the return.
If you paid an underpayment penalty, TurboTax automatically generates IRS Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts).
- The underpayment penalty transfers from Form 2210 to Form 1040, 1040-SR, or 1040-NR, line 38, Estimated tax penalty.
- Taxes are pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year. Underpayment penalties are assessed if you don't withhold or pay enough tax on income received during each quarter.
Tip: To reduce or possibly even eliminate your underpayment penalty, search for annualizing your tax (use this exact phrase) inside TurboTax. This will take you to the underpayment penalty section and we'll take you through the steps to possibly reduce your underpayment penalty. (If you don’t see Jump to annualizing your tax in the search results, make sure you’re in your return and not on the Tax Home page.).
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I went through the steps to reduce my penalty, including specifying my cumulative income for each quarter (my income was significantly weighted toward the third and fourth quarters). But no matter what numbers I put in there the penalty remains exactly the same. Any suggestion on what I'm doing wrong?
If you haven't had a penalty in the last 3 years, let the IRS calculate the penalty then ask for it to be waived when you get the notice. You may qualify for administrative relief from penalties for failing to file a tax return, pay on time, and/or to deposit taxes when due under the First Time Penalty Abatement policy if the following are true:
- You didn’t previously have to file a return or you have no penalties for the 3 tax years prior to the tax year in which you received a penalty.
- You filed all currently required returns or filed an extension of time to file.
- You have paid, or arranged to pay, any tax due.
"the estimated tax penalty is generally not “abatable” by the taxpayers. Rather, taxpayers can request an exclusion from the penalty when filing their tax return (individuals use Form 2210)."
Form 2210 has not yet been finalized, but should be available later today (2/25/2021).
In TurboTax CD/Download, you will be prompted to download any updates available when you open the program. You can also update the program while you have it open by following these steps:
- Click on the Online link in the black bar at the top of the page.
- Click on Check for Updates.
- TurboTax will download and install any updates available. If there aren't any updates, you will receive the message "Your software is up to date."
TurboTax Online automatically updates the website when the forms become available.
The details of the calculation are a long and complicated subject. But essentially, it's 5% interest on the amount you underpaid at each of the quarterly due dates.
If you don't pay the penalty with your tax return, then the IRS will send you a bill. That's really the easiest way.
However, there are several different ways of accounting for when your withholding was received and when your tax liability was incurred. The IRS uses the basic method of assuming that all your withholding and tax liability was divided equally among the four quarters.
You may be able to get a lower penalty by using an alternative calculation, but you have to show your work to the IRS. If you had more withholding in the early part of the year, then you can enter into TurboTax exactly when it was withheld, and possibly reduce your penalty. Similarly, if you had lots of income late in the year, then you can show that you didn't need to pay earlier in the year, and reduce your penalty.
Side note: stop using the phrase "I neglected to..." This has a specific legal meaning, that you didn't care enough about your tax obligations to do it correctly. Don't admit to neglect, when no one has accused you of it. You simply didn't pay your quarterly tax. That's correct and sufficient, and all you need to say.