Safe harbor to avoid underpayment penalty

[WashingtonResident]

In Fall 2024, I calculated the safe harbor by multiplying 1.1 by my total tax from 2023. I then looked at my paystub and extrapolated what I thought I'd pay in taxes through the rest of 2024, and it seemed like I was comfortably over the safe harbor amount. But as I'm doing my taxes now, TurboTax is saying I'll have a modest underpayment penalty. How can I improve the way I'm calculating my numbers so I don't incur another penalty next year? For example, maybe I didn't look at the correct lines on my paystub, or maybe I didn't factor in that some items get maxed out towards the end of the year, resulting in larger year-end paychecks? Or maybe there's some other way to avoid underpaying?

[VolvoGirl]

I don’t know about figuring for 2025.  But for the underpayment penalty……

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.

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

[RobertB4444]

Do what @VolvoGirl says for this year.

If you are multiplying your total tax - not the amount that is due after withholding and everything but the total tax - by 1.1 you should be fine with the penalty avoidance.

@WashingtonResident 

[WashingtonResident]

Thanks @VolvoGirl and @RobertB4444. I don't have a Form 2210. I see where it says that the IRS will figure it out for you. Is that the same thing as TurboTax doing the calculation? TurboTax gave me an amount I owe for the penalty, but I don't know where it got that number. 

[DawnC]

No, it is not the same thing.  If you mark the Let the IRS figure the penalty and bill me later, Form 2210 does not get sent to the IRS.  Underpayment of estimated tax by individuals applies when you don’t pay estimated tax accurately or on time as an individual.

If you want TurboTax to figure the penalty, don't check that box (Let the IRS figure the penalty) and go through the penalty interview.  You will also be asked if you want to try to lower or eliminate the penalty by annualizing your income.   Or you can request a waiver.  For any of these options, Form 2210 is included in your return and sent to the IRS.   Your estimated penalty will show on Line 38 - that has to be paid in addition to your tax due from Line 37 if you are choosing to include the penalty instead of letting the IRS figure the penalty.

The simplest option is to check the box and allow the IRS to figure the penalty.   But if you want to remove or reduce the penalty, you need the Form 2210 completed.  

If you meet the conditions below; there is no penalty.  From IRS topic - Underpayment of Individual Estimated Tax

• Your filed tax return shows you owe less than $1,000 or
• You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less. If your adjusted gross income (AGI) for 2023 was more than $150,000 ($75,000 if your filing status for 2024 is married filing separately), substitute 110% for 100%.

The IRS urges taxpayers to check into their options to avoid these penalties.

• Check your withholding often and adjust it when your situation changes. To do this fill out a new Form W-4 and give it to your employer. The Tax Withholding Estimator is a helpful tool.
• Estimated tax is the method used to pay tax on income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.). Use Form 1040-ES to figure and pay estimated taxes on time.

How the penalty is calculated

[Jo King]

Hi,

I made estimated tax payment by 01/15/2025 so that my estimated payment + tax withheld in 2024 was greater than 110% of my total taxes in 2023.  I thought this was Safe Harbor and there will not be any estimated tax penalty.  However, Turbo tax is showing a penalty.

And there doesn't seem to be a way for me to challenge this penalty on TurboTax?

Any help is appreciated.

[MonikaK1]

Paying all of your tax prior to the due date of the tax return will ensure that you avoid interest for late payment. However, depending on when you made your tax payments, you could still be subject to the underpayment of estimated tax penalty (Form 2210).

If TurboTax is showing an underpayment penalty on your return, visit or revisit the Underpayment Penalty section under Other Tax Situations and answer the interview questions. The penalty calculation may change based on your answers, including information about when your withholding was applied. In addition, if you believe you qualify for a waiver of the penalty, you can request a waiver in that section.

The IRS may reduce an underpayment penalty if any of the following apply:

• You or your spouse (if you file a joint return) retired in the past 2 years after reaching age 62 or became disabled and you had reasonable cause to underpay or pay your estimated tax late. See Waiver of Penalty in Instructions for Form 2210PDF.
• You had most of your income tax withheld early in the year instead of spreading it equally through the year. 
• Your income varies during the year. Complete Form 2210, Schedule AI, Annualized Income Installment Method PDF(found within the form).

The penalty for underpayment of estimated tax can also be removed to the extent that the underpayment is the result of a casualty, local disaster, or other unusual circumstance such that it would not be fair to impose the penalty.

See here for information about different TurboTax tools you can use to calculate withholding and estimated taxes.

See this TurboTax tips article for more information about Form 2210.

[whodiini]

According to the info I entered into TT 2025 tax year, I paid over 110% of the tax due in 2024 AND I overpaid the taxes for 2025 so I get a refund.  This should satisfy safe harbor, but in the interview, it never brings up the safe harbor and it charges me a penalty.  I go to forms and in 2210, there is a box A to request a waiver, but I am unable to select it.  It is very tedious to go thru the annualized income installment method so safe harbor is much easier, if TT would allow me to use it.  

Do you know why TT does not implement safe harbor for underpayment penalty?

[PatriciaV]

If TurboTax is showing an underpayment penalty on your return, review your answers in the Underpayment Penalty section under Other Tax Situations. Also check the criteria in the Tax Tips article MonikaK1 mentioned (What is Form 2210?) to be sure you qualify. This process is how TurboTax implements the safe harbor provisions of the underpayment penalty. Even if you do qualify, you may find that you need to use the annualized income method to remove or reduce the penalty.

[baldietax]

TT implements safe harbor / penalty calcs.  But it depends how you met the safe harbor it was thru uneven estimated taxes and you made estimated tax payments later in the year (common for Roth conversions in Q4 for example), you can meet the safe harbor - you could even have a refund - but you may still have underpaid for the earlier quarters.  If your estimate tax was late in the year to line up with uneven income earned late in the year then Form 2210 AI may reduce or eliminate it.  If your estimated tax was simply late against income earned earlier or throughout the year then AI method won't help.

You can bring up for Form 2210 to see the calculation and why there was an underpayment.  If you are on desktop double click thru line 38 to the worksheet and again, it will bring up Form 2210 which may not be shown by default unless you select one of the exception options under Other Tax Situations.

[whodiini]

Thank you for the clarification. . The description of safe harbor in many places is incomplete in that they dont mention the assumption of even withholdings/estimated tax payments throughout the year.  So I will need to fill the 2210 AI in any case.  Overpayment of taxes doesnt help eliminate the need of filling out the 2210Ai.