Question on Underpayment Penalty.

[herrd89]

Hello, I am subject to Underpayment Penalty and I receive W-2 so there is no tax I owe (something that I must report on my own). I've read posts about Underpayment Penalty so I get the concept what it is but the question is why I am subject to it when I am trying to file 2024 tax return? I paid my due before April 2024 (For 2023 Tax Return) and for the first time the tax return had Form 1040-ES Payment Voucher within the tax return. It basically says voucher tax payment in four payments (due 4/15/24, 6/16/24, 9/16/24, and 1/15/25) and is the underpayment penalty due to not paying the tax owed each quarter? I mean.. I paid the whole tax due amount when I filed my tax return around 02/2024 time frame. Could someone explain this please?

[herrd89]

Also I checked my IRS page and I don't owe any due (obviously, because I paid the total due amount when I filed my tax return) 

[SharonD007]

The federal tax system is a pay as you go system.  As you make money, you have to pay taxes on that money. You may have an underpayment penalty if you didn't have enough taxes withheld from your income throughout the year. 

You can get hit with an underpayment penalty in the situation you described because you didn't pay the estimated quarterly taxes when they were due.

You can contact the IRS to request a one-time abatement of your underpayment penalty. For individual tax returns, call 1-800-829-1040, 7 AM - 7 PM Monday through Friday local time.

For more information, refer to the TurboTax help article Guide to IRS Tax Penalties: How to Avoid or Reduce Them.

 Review ‌IRS topic 306, Penalty for underpayment of estimated tax for additional information. Also, review the TurboTax Help article Why am I getting an underpayment penalty?

[herrd89]

Thank you for your response but I still don get it. what do you mean by I did not pay the estimated quarterly taxes when they were due? Let's say I was due $1700 last year (2024 tax return) and paid the whole amount when I filed the tax return (Feb 2024). 

Are you saying since my tax owed to fed was greater than$1,000 on 2024 tax return, I should've filed 1/4 amount of $1700 every quarter throughout the 2024 year?

If so, I should've paid the estimated tax ahead of the actual tax filing in Jan-Apr 2025 period?

[fanfare · Accepted solution]

Jan 15th, 2025 is the last of four payments for 2024.
April 15th is Tax Day for 2024.

April 15th 2025 is  also  the due date for the first Estimated Tax payment for 2025.

If you have a refund and  apply some of your refund to next year, that is considered to be your first estimated Tax payment.

The pament is 1/4th of your total tax, not 1/4th of the amount you owe on April 15.

if you are a regular W-2 employee subject to withholding, that takes the place of Estimated Tax payments.

@herrd89 

[Mike9241 · Accepted solution]

Your issue is that you paid the full amount due with your return. the tax laws require that 1/4 of your 2024 taxes be paid by each of these dates  4/15/24, 6/15/2024, 9/15/2024, 1/15/2025

the amount is based on the smaller of 90% of your 2024 taxes or 100%(110% if your 2023 AGI was over $150K) of your 2023 taxes 

there is no penalty if after subtracting your withholding from your 2024 tax liability you owe less than $1000

Turbotax assume 1/4 of your withholding occurred for each of the periods but you can use actual

here's a simplified example

2023 agi less than $150K

2023 tax $4000

2024 tax $5000

2024 withholding $2000

90% of 2024 tax would be $4500

so the 2023 tax liability is used because it is less

you owe more than the $1000 safe harbor (2024 tax less withholding) 

so $1000 (1/4 of your 2023 taxes needed to be paid in each period)

but you only had $500 paid in each period. the default method has 1/4 of your withholding being applied  each period

so you have a $500 underpayment for each period and are therefore subject to the underpayment penalty

********************************************

the safe harbor rules for 2025 to avoid the underpayment penalty (based on current law)

There will be no federal penalties for not paying enough taxes during the year if withholding and
a) timely estimated tax payments equal or exceed 90% of your 2025 tax or
b) timely estimated tax payments equal or exceed 100% of your 2024 tax (110% if your 2024 adjusted gross income was more than $150K) or
c) the balance due after subtracting taxes withheld from 90% of your 2025 tax is less than $1,000 or

d) your total taxes are less than $1,000

state laws differ

Turbotax should figure the estimates required for 2025 but it's your responsibility to see that withholding does not fall below what it was for 2024

[herrd89]

Hello,

The payment is 1/4th of your total tax, not 1/4th of the amount you owe on April 15. - Understood. 

So here are my takeaways,

1) if I owed more than $1,000 on prior year' tax return, I should file and pay estimated quarterly tax payment (pay a I earn through out the year).

2) Though I paid the tax owned in full, my tax owed amount was greater than $1,000 so I should've filed and paid estimated quarterly taxes (ongoing year payment, as I pay as I earn). 

3) I guess filing estimated quarterly tax payment will become a norm if my tax owed is greater than $,1000 every year. 

Question is, is there a way I can file abatement (first time waiver) through TurboTax? I just don;t want to wait the IRS phone line and deal with them. 

[herrd89]

Hi Mike 9241,

Thank you for the answer. I feel dumb at this point but I am still not getting that where you said, "Your issue is that you paid the full amount due with your return. the tax laws require that 1/4 of your 2024 taxes be paid by each of these dates  4/15/24, 6/15/2024, 9/15/2024, 1/15/2025"

- yes I paid the full amount due (which was $1700 on fed) and you are saying since the tax due amount was greater than $1,000, now I am required to pay 1/3 of my 2024 taxes on those dates? So that $1,700 amount is the taxes I had to pay on 2023 earnings and since it was greater than $1,000, now the system triggered I should file estimated quarterly tax payment (not tax due, the actual quarterly withholding)? 

Here is what I am still not getting, example is,

my 2023 federal tax withholding was 14,000

my 2023 actual tax I should've paid was 15,700

So I owed $1,700 to the govt and I paid it when I filed my tax return on Feb 2024.

Now I am doing 2024 tax return on Feb 2025. 

It is now asking me to file quarterly estimated TAX payment.

My tax last year was $15,700 and let's say it is about $16,000 and I should pay $4,000 amount every quarter? 

OR do you mean since my tax owed last year was $1,700, it is likely I will owe close amount this year and I should file estimated quarterly payment amount of $425 on those dates?