Underpayment Penalty incorrectly calculated

[rmech2]

I have the same issue this year. I paid more in deductions and estimated taxes than 2020 tax, both federal and CA and TT is hitting me with underpayment penalty for both.

[MarilynG]

When entering your Estimated Taxes paid, try using the pre-filled in quarterly dates and just enter the amounts you paid each quarter.

If you're using TurboTax Online, you could delete Form 2210, close TurboTax, clear your Cache and Cookies and go back to the Estimated Payments section.

Here's more info on Underpayment Penalties.

[Mocha42]

Is there a new search term to use for TY2022? "annualizing your tax" no longer finds anything in TT.

I paid more than 100% of last year's tax. I paid more than 90% of this year's tax. I owe less than $1,000. I retired partway through the year, and by my back-of-the-envelope calculations, I've been up-to-date with taxes throughout the entire year, yet Turbotax Premier MacOS says I owe a penalty. Very frustrating!

[ThomasM125]

If you type in Underpayment Penalty in the search box on your TurboTax screen you should get the jump to underpayment penalty option you are seeking. You not only need to pay in the correct amount of estimated tax, but you need to do it quarterly on a timely basis. It is possible that the dates entered for your estimated tax payments is what is resulting in your late payment penalty.

[Mocha42]

Thanks @ThomasM125 ! I was typing it in the "Search" box that unfurls at the right side of the menu bar, *not* the "Search Topics" button. Guess I needed more coffee. Now I need to play around with the annualization to see how much work I want to do to reclaim my $35.

[js409]

Hello @ThomasM125 .  I'm having a similar problem with possible inaccurate Underpayment Penalty.  I "finished" my return but haven't filed of course until I have this checked out.  I owed $106 in 2022 which was understandable and fine.  For 2023, TurboTax Online is calculating $3322 and not requiring Form 2210 to be filed.  Therefore, I'm having difficulty determining how this penalty was calculated without seeing the form.  I'm willing to share a redacted copy of my return to help.  Let me know if you have questions for me.  Thank you very much.

[VolvoGirl]

@js409   The underpayment penalty is just an estimated amount.  

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

[js409]

@VolvoGirl  -  Thanks for the quick reply.  I have visited the "Other Tax Situations" and "Underpayment Penalties" section many times.  (I even "Clear & Start Over" my entire return with the same penalty result).  I do not "Annualize Income".  I do not think I should treat "Actual Withholdings" as paid in four equally quarterly installments vs withheld either (?).   Haven't in the past.  I have a W-2 that takes withholdings throughout the year (twice a month) and a varying bonus (w/ withholdings) that can fluctuate.  Some dividends that are higher is year and have some vested company stock.  Very similar to last year where I only paid $106.

[DianeW777]

It depends.  If your income is received evenly throughout the year, then annualizing may not be useful.  The IRS allows all tax withheld during the year to be considered as paid evenly throughout the year, regardless of when paid/withheld.  However, if you paid any estimated tax payments they are considered only on actual payment dates.

Vested stock and your bonus can both contribute to this year's penalty increase.

In your situation, it's quite possible to have an underpayment penalty for two reason. The amount of the underpayment penalty depends on the tax due.

1. The withholding on your pay checks is not enough, and
2. There was an increase in the income that does not have any withholding and estimated tax was not paid or not enough was paid to cover this income.

Annualizing your income will not be helpful if you did receive all of your income evenly.  It does help those who have a high amount of income in the last quarter of the year.

Penalty Reasons:

Generally, you can avoid the penalty if your total timely estimated payments and withholdings are greater than or equal to the lesser of:

• 90% of the total tax after credits for the current year, or
• 100% of the total tax after credits in the prior year
• See one exception below.

You can also avoid the penalty if the amount you owe is less than $1,000 as long as any estimated tax payments you made are timely.

Note: High-income taxpayers. If your adjusted gross income (line 11 of your 2023 Form 1040) is greater than $150,000 (or $75,000 if you're married and file a separate return from your spouse), you can avoid a penalty by paying at least 110% of your total tax from the prior year.

@js409 

[Edited: 03/25/2023 | 6:48 AM PST]

[js409]

@DianeW777   Appreciate your valuable input.  Yes, salary is received evenly throughout the year.  However, vested stock and bonus were first quarter with standard taxes taken out though.  I have NOT paid any Estimated Tax Payments like on the beginning pages of the Tax Return.  Do you actually recommend it?  I was always ok having a balance due for Federal as I saved for it.  Avoiding the $3322 penalty is worthwhile though.

Can dividend and interest income affect an Underpayment Penalty significantly too?

Would 2022 income (w/ $106 Underpayment Penalty) also affect the 2023 Underpayment Penalty amount?

You mentioned:

"Note: High-income taxpayers. If your adjusted gross income (line 11 of your 2023 Form 1040) is greater than $150,000 (or $75,000 if you're married and file a separate return from your spouse), you can avoid a penalty by paying at least 110% of your total tax from the prior year."

How do you go about paying $110%+ of your total tax from the previous year?  Through Estimated Payments with values higher than the four quarter Tax Return recommends maybe???

Thank you!

[MonikaK1]

Any type of taxable income can affect the computation of the underpayment penalty. 

However, If most of your income is spread evenly throughout the year and you are primarily paid as an employee, and if you think your withholding in 2024 might be just a little bit short of what you need to avoid a penalty next year, you can revise your W-4 with your employer to take out a specific additional amount each pay period to cover the difference. See step 4c on Form W-4 (2024). This would be easier than setting up quarterly estimated payments if most of your income is from wages.

See this tax tips article for more information about revising Form W-4.