Roth conversion and under payment penalty

[baldietax]

@Al816 yes you will need to file Form 2210 AI method to show the IRS how your income was uneven and your uneven ES payment lined up with it - it should substantially reduce the penalty if not eliminate it (any other timing issues thru the year may result in some residual penalty depending how it works out).

to work thru this method go to Other Tax Situations / Underpayment Penalties.  You will need to calculate offline and input a cumulative AGI for the 3 interim quarters (uneven - thru 3/31, 5/31, 8/31; and 12/31 is your full return) along with withholding, LTCG, qualified dividends etc.  To determine this AGI you basically have to mimic your return through 1040 Line 11 and split up any wages, interest, dividends, cap gains etc by quarter.  At the end you will be asked if you want to adopt the method or it will continue to use the default underpayment calc.  You should be able to check the outcome on Form 2210 in your return and 1040 Line 38.

Not sure about MD but the state tax program should have a similar interview section for underpayment penalty.

for more info/guidance see Form 2210 instructions

https://www.irs.gov/forms-pubs/about-form-2210

[dmertz]

TurboTax's value for Effective Tax Rate is a relatively meaningless number.  It is not useful for your purpose.  What you need to do is to determine your marginal tax rate, which is the rate by which your tax increases for additional dollars of income, something that TurboTax does not calculate.  To avoid penalties, you either need to pay sufficient quarterly estimated tax payment or have sufficient taxes withheld to meet the safe-harbor of 100% (or 110% for those with higher AGI) of the previous year's tax liability, or you need to do an accurate simulation of your expected tax liability based on expected income numbers.  The desktop version of TurboTax does have a What-If Worksheet in forms mode that can assist with this.

As RogerD1 said, the tax system is pay as you go, quarterly.  You can still have a penalty for earlier quarters if you underpay for earlier quarters even though you overpay in later quarters.  However, this can't happen if all of your taxes are paid through withholding, not with estimated tax payments, because, by default, both income and tax withholding are treated as received and paid evenly throughout the year.  Estimated tax payments are only credited on the date that they are actually paid.

[rogersdan164]

Yes, I know that now and have recalculated additional withhhanolding from retirement accounts.  Thanks

[DaveF1006]

You will use the The Annualized Income Installment Method.It lets the government know you didn’t owe that money in April or June since you hadn’t sold the stock or converted the Roth yet.

1. Federal: Form 2210 and Schedule AI in TurboTax

Since you mentioned not being tech-savvy, the "Step-by-Step" interview is usually safer than "Forms Mode," as it does the math for you.

1. Go to the Federal tax.
2. Select Other Tax Situations at the top.
3. Scroll down to Additional Tax Payments and click "Start" or "Update" next to Underpayment Penalties.
4. TurboTax will say you have a penalty. Click Continue.
5. Look for a screen that asks about Penalty Exceptions. You want to find the question: "Annualized Income Method: Do you want to use the annualized income installment method to calculate your penalty?" Select Yes.
6.  You will reach a grid with four columns (representing different periods of the year). You must enter your cumulative income for each period.

• Period 1 (Jan 1 – Mar 31): Only include income earned in these 3 months.
• Period 2 (Jan 1 – May 31): Everything from Period 1 + April and May.
• Period 3 (Jan 1 – Aug 31): Everything through August.
• Period 4 (Jan 1 – Dec 31): Your total year's income (this should match your 1040).

Since your stock sale and Roth conversion happened in Nov/Dec, your income in the first three columns should be much lower, which should eliminate the penalty.

2. Maryland: Form 502UP

Maryland has its own version called Form 502UP (Underpayment of Estimated Maryland Income Tax).

1. Go to the State Taxes tab and start/continue your Maryland return.
2. Proceed through the interview until you see a screen titled "A few things before we wrap up your state taxes" or a section for "Other Situations."
3. Look for Estimated Tax Penalty (or Underpayment Penalty).
4. Just like the federal side, it will ask if you want to use the Annualized Income Installment Method. Select Yes.

The Maryland Grid: Maryland’s Form 502UP is very similar to the federal Schedule AI. You will enter your Maryland Adjusted Gross Income (MAGI) cumulatively for the periods provided.

Important Note: If TurboTax does not prompt you for this in the state interview, you may need to switch to Forms Mode (click the "Forms" icon in the top right of the desktop program). Find Form 502UP in the list on the left, and check the box that says "Annualized Income Installment Method" to unlock the manual entry fields.

[Al816]

@DaveF1006 Thanks so much for the detailed steps!  I was able to make the adjustments for both Federal and Maryland taxes...and eliminate the penalties for both.

Thanks again!