TurboTax Premier Incorrectly Calculated Underpayment Penalty Using Annualized Method

[jstroebel]

I received a large chunk of my AGI in December 2024 from Required Minimum Distributions from tax free accounts (another thing that sucks about being in your 70's).  As a result I was under withheld and was being charged an underpayment penalty of over $1,000.    I figured this was exactly the situation that was meant to be addressed by using the annualized method (actually inputting when you received income as opposed to assuming it was equally spread throughout the year), so I went back to segment of the interview when the tax underpayment penalty was calculated and elected to use the annualized method.  The interview then required me to allocate my received income into three periods--1/1-3/31/24; 1/1/-5/31/24 and 1/1-8/3124.  I had to do this not only for ordinary income but also for Short Term Cap Gains, Long Term Cap Gains and Qualified Dividends.  I also had to allocate certain taxes paid (Medicare Taxes, Foreign Taxes) among these periods.  Assembling all this data was a fair amount of work--but at the end of the process, TurboTax was telling me there was no difference in my underpayment penalty--still over $1,000.  I said this cannot be and decided to delve into the forms.  

When I looked at the Form for calculating the underpayment penalty (Form 2210) on the first page of the Form in Part II there is a box to be checked "If your income varied during the year and your penalty is reduced or eliminated when figured using the annualized income method.  You must figure the penalty using Schedule A1...".   This box was not checked.  I then navigated to Schedule A1 to Form 2210 and observed that none of the information on actual payment dates of income and taxes that I laboriously entered into the interview had been carried to the schedule.  So I proceeded to manually re-enter the information in the appropriate boxes on the Schedule.  Voila, my underpayment penalty was reduced by over $500.

It would appear to me that this is a programming glitch which is failing to transfer the information I entered in the interview to the Schedule.  This is a fault in the program which was going to cost me real money.

Of course, there is no one to talk to at TurboTax to point this fault out to--so Buyer Beware.

[crash345u]

I am very interested in hearing TT response to this problem.

I am wondering if you had withholdings equal to 100% of last year's tax obligation if it would have avoided the penalty. That assumes the IRA custodian allows you to specify sufficient withholdings.

[DaveF1006]

Generally, if you had withholdings equal to 100% of last year's tax obligation, you might have avoided the underpayment penalty, provided your adjusted gross income (AGI) was $150,000 or less. The IRS allows taxpayers to avoid penalties if they pay either 90% of the current year's tax or 100% of the prior year's tax, whichever is smaller.

However, if your AGI exceeded $150,000, the threshold increases to 110% of the prior year's tax. Additionally, the IRS requires estimated tax payments to be made quarterly, so even if you met the withholding requirement, timing could still impact whether a penalty applies.

Your IRA custodian's rules on withholding are important here. Some custodians let you set withholding amounts, while others may have limits. You need to contact them to find out what their policy is in regards to setting your withholding amounts. 

Underpayment of estimated tax by individuals penalty

@crash345u 

[jstroebel]

Thanks.  Yes, I am aware of the IRS's requirements on withholding.  Believe it or not, I am 74 years old and have never filed estimated tax returns.  When I was working all my income was W-2 and was withheld by my employers.   Since I have been retired I have continued not to file quarterly estimated tax payments and was mostly happy to pay underpayment penalties of a couple of hundred dollars at the end of the year to avoid having to file multiple tax returns.  But this year the penalty was over $1,000 because of the December RMD's.  

The reason for my posting was to point out that the TurboTax program was not working property.  When I went back to my return and re-did the part that dealt with the underpayment penalty and went to all the trouble of annualizing capital gains (long and short term), qualified dividends and my ordinary income into the three mandated periods. I was dismayed to learn that TurboTax was still showing the same penalty.  As I said in my original post, this was apparently because the new data that I input to annualize my income was not being carried from the interview onto the tax forms.  When I did this manually, I got a quite different result and saved myself about $600.  THE PROGRAM IS NOT WORKING PROPERLY AND SOMEONE AT TURBOTAX SHOULD LOOK INTO THIS.

[royper]

I'm having the same problem.  When I change the taxes paid in a quarter sometimes the penalty changes and sometimes it doesn't.  Seems to be a bug in the program.  I'm using deluxe on the desktop. 

Anyone know what to change that might trigger an update?

[VolvoGirl]

If you get a penalty on 1040 line 38, 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.

How to add form 2210 for Underpayment Penalty
https://ttlc.intuit.com/community/tax-payments/help/how-do-i-add-form-2210/00/25703

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

[baldietax]

@royper tbh it's unlikely to be a bug, TT is very solid on it's core tax calcs.

Penalty is calculated quarterly and if you had uneven payments then you can get underpayments or overpayments so it depends how those quarterly payments line up with the safe harbor threshold.

If you are on desktop then go to Forms mode, if you don't see Form 2210 in the list of forms then double-click on the penalty line on Form 1040 and double-click again on the penalty line in the 1040 worksheet to bring up Form 2210 which will show you how the penalty is being calculated.

If still stuck if you can provide more specifics then someone here may be able to explain further.

[jstroebel]

I truly appreciate anyone with expertise who tries to offer help in a Community Forum such as this.  However, it sometimes seems as if people posting help never read the initial post. (Except maybe the one person who noted that he was having the same problem with a different version of the software.)

My issue was not that I had to pay an underpayment penalty (I think at some level I understand how that works), but that the using the interview interface with the software, the calculated penalty did not change when I went back to the part of the interview where the underpayment penalty is calculated and elected to use the annualized income approach to calculating the penalty (entering all the data requested by the interview for 4 different types of income and portioning those four types into the four periods specified (1/1-3/31/24, 1/1-5/31/25 and 1/1-8/31/24).  I was surprised that this did not result in a reduction of the underpayment penalty since I received over 1/2 of my annual income in the last month of the year.

This led me to look at the forms which were created with the data that I entered via the interview process and I noted that form 2210 had not selected the option to attempt to reduce the penalty by annualizing income and that none of the data that I entered during the interview process annualizing my income had been carried to to Schedule A1 to Form 2210.  In other words, the interview process was not properly interfacing with the forms.

I then proceeded to manually enter the required income annualization data directly onto the Tax forms and Voila my penalty was reduced by more than 1/2,

So, I don't need help in calculating my penalty (I believe that by entering the data directly into the forms the software has done this), but I do believe that there is a bug in the software that is failing to post data entered via the interview process onto Form 2210 and its Schedule.  Apparently, at least one other responder to my post has experienced a similar issue.

[NewStart78]

Essentially the same scenario for us, including taking a lump sum RMD in December.  Our annual income ended up higher than I had expected so we owed more tax, and therefore had to pay the "failure for proper estimated tax" penalty that TurboTax Deluxe calculated to be $332.  Okay, whatever, but then last week we were refunded $297.10 by the IRS because they said that our penalty should have only been $24.90.

We have Federal tax withheld monthly from pensions, and also have a chunk of money taken out of the December RMD for Federal tax.

[jstroebel]

So, to clarify, did you use the "Interview" interface to enter the relevant information for calculation of the under withholding penalty or did you input your data directly into the appropriate forms (Form 2210 and its Schedule A1)?  Did you ask the interview to see if your penalty could be lowered by annualizing your income?

[crash345u]

@DaveF1006 

Can you please clarify your statement below "so even if you met the withholding requirement, timing could still impact whether a penalty applies" I can't find this language anywhere. My understanding was withholdings were always considered even payments. 

However, if your AGI exceeded $150,000, the threshold increases to 110% of the prior year's tax. Additionally, the IRS requires estimated tax payments to be made quarterly, so even if you met the withholding requirement, timing could still impact whether a penalty applies.

[NewStart78]

Interview style only. 

I did not interrogate the software.  I just followed the interview path. 

[NOMDDC]

100%.  my income is largely Q4, and I annualized every year.  The software follows until the end of my entries, and then the system reverts to previous calcs with a full penalty.  This is a bug.   Stay tuned... 

[jstroebel]

Well, as they say, when it happens once--**bleep** happens.  When happens twice, a coincidence; a third time and it's enemy action.  So, we have three users posting in this thread who used the interview approach and tried to get the software to properly calculate an under payment penalty using the annualized income approach and the software fails to calculate the penalty properly.  In my case, I used the interview approach and when it appeared to be incorrectly calculating the penalty (the indicated penalty did not change from the non-annualized approach), I checked the actual forms and found that none of the data that I had entered in the interview process had been carried to the forms.

TurboTax--are you listening??!!!  There is a bug in your program.

[ct8889]

I have the same issue. My income is uneven throughout the year, and I received a major chunk of income in August 2024. After entering all the numbers TurboTax asks, the underpayment penalty stays the same. 

Does anyone know how to fix this issue?