Question on underpayment penalty and annualizing my income

[sutherlandws]

I just finished my taxes for 2024 (not yet submitted) and was reviewing the results. It shows I have an underpayment penalty and is asking me if I want to annualize my income.  Looking for advice.

1) I lost my job as of January 31, 2024. I received 1 month of normal salary, a large amount for unused vacation, and a severance package payment, all in February. This was around $61,500 total and constitutes the bulk of MY income in 2024.  Note that the size of the Severance triggered my company to pull much more federal tax from that final check than normal.

2) I filed for unemployment benefits (Texas) and received payments for several months starting in March of 2024.  When I filed for unemployment, I selected the box to have taxes pulled from my payment.  I captured my form just before I hit 'submit' for my records, and this shows the box checked. However, the State of Texas says I did not check the box, so no taxes were pulled from the $15K total I received.  

3) I did some consulting.  I started an LLC and received a total of $10,500 for consulting. However, I did not get paid until near the end of January.  While my online bank did pull out taxes into a separate account, I was not aware that I could still pay Estimated Taxes on that amount, so I did not pay this.

4) When I was filling out my taxes, I entered in 1099 (DIV, INT, and B) data from two taxable investment accounts. I did not realize we had a total of over $110K in short-term and long-term gains, which resulted in an additional tax of around $25K that was not expected and I only noticed it when I entered the data into TT.

5) My wife was employed the full year with regular income and taxes pulled, and earned around $160K. 

I was concerned that I might have an underpayment penalty for the consulting income, since I found out after the fact that I could have paid the estimated taxes in early 2025.  This was my first year of consulting under an LLC, and I screwed up.  I was also concerned when I got the W2 from the State of Texas and saw NO tax pulled.  I had wrongly assumed that, since I checked the box, they were doing it right.  The last time I was on unemployment in Texas many years ago, I did NOT have this issue.  I know it is my responsibility to confirm that what I submitted was being implemented, but I did not do so.

I suspect that the underpayment penalty is mostly due to the unexpected capital gains. Since I don't know the final amount until I receive my 1099's (assuming I am facile at interpreting them, of course), but I normally don't get those until Feb of the following year, so it would be too late for me to submit any additional tax payment for the income.

So, given all that, do I have any recourse to avoid paying the almost $400 in underpayment penalty?  Thanks!

[fanfare]

to avoid penalty, compute your Required Annual Payment using the prior year's tax rule.

Each quarter your withholding plus estimated tax paid must be at least 25% of that amount, even if your income is uneven,

You are protected from unplanned jumps in income such as capital gains or bonus.

That won't help you now. Assuming $400 is a lot of money,

it is worth your time and effort to attempt to see if Schedule AI can reduce your penalty

[Mike9241]

So, given all that, do I have any recourse to avoid paying the almost $400 in underpayment penalty?  I don't think you have reasonable cause to justify a waiver.  

There is something you can do that might lower your penalty. there's an option to use actual withholding for each period. you would check box D on the 2210 and enter your withholding for each period specified. The default used by Turbotax to figure your penalty,  is 1/4 of your withholding is deemed to occur each period. 

If that does not work there is the AI method. 

for 2025 there are two safe harbors that would likely apply

1) 2025 withholding and timely estimated tax payments = > 90% of 2025 tax (each estimate = 22.5% of 2025 tax less withholding for the 2025 period) almost impossible to know on a timely basis  

2) 2025 withholding and timely estimates => 110% of your 2024 tax ( each estimate = 27.5% of 2024 tax less withholding for the 2025 period). The alternative for each estimate if you know what your withholding will be for all of 2025 is (110% 20204 tax less withholding for 2025) divided by 4.

paying estimates is voluntary, but failure to have enough withheld to meet either safe harbor results in underpayment penalties. 

[sutherlandws]

Thanks.  I am in the middle of TT entering data to annualize my income to do just that.  However, I am stuck at one point.  I am staring at a screen that is asking me to determine my Net Capital Gains, and it wants me to enter my Short-Term Capital Gains/Loss, my Long-Term Capital Gains/Loss, my Unrecaptured 1250 Gain, AND my Qualified Dividends BY QUARTER.  All I have is the numbers for the year, so how do I determine what the gains were each quarter for each of these items?

[fanfare]

you have to review your brokerage statements month ending just after the period involved and any SELL confirmations.

You will probably need a spreadsheet.