I am self employed, filing jointly with my W2 husband, and received an underpayment penalty of $1071. However, our overall Total Tax number is less than our Total Tax Withheld or Already Paid. Hoping someone can help clarify how this is the case?
I have an idea that the government assumes you make all your income / pay all your quarterly estimated taxes evenly across each quarter of the year. Unfortunately my income varies/fluctuates where I can make much less in the beginning of the year and more in the later part of the year. And so I paid my quarterly estimated taxes based on how much money made in each respective quarter (this makes the most sense to me), as I do not know by year's end how much total income I will have brought in.
If I select the option to "Let the IRS calculate" the penalty - then the underpayment penalty gets moved off the return and I believe I would likely just receive a separate bill in the mail, is that correct? Once received, am I able to rebut the penalty by showing that I paid the rightful amount of tax each quarter for how much income was being made? Again, our Total Tax for the year came out to less than the Total Tax Withheld or Already Paid.
Yes, you would receive a separate bill in the mail, and it may be higher if you don't use the annualized method to try to eliminate or reduce the penalty. You can always respond to the letter with the 2210 and the annualized method should you need to.
Here is a summary of how the underpayment penalty works.
Please keep in mind that you can pay at least as much as the tax liability for 2024 (or 110% of that amount depending on your income) to eliminate underpayment penalty as long as the payments are paid equally throughout the year. In this scenario the IRS will not look at the current year tax liability but the payments and tax liability for 2024.
Quarterly taxes are due each period. The information below should help you determine the correct amount to pay each period if you want to pay enough to closely cover your tax liability for 2025.
So you have a 1071 penalty on 1040 line 38? And a refund on line 35a? It is possible to have penalty when getting a refund. You need to fill out form 2210. Yes you can delete it and let the IRS bill you.
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.
It's under
Federal or Personal (for Home & Business Desktop)
Other Tax Situations
Additional Tax Payments
Underpayment Penalties - Click the Start or update button
I cannot replicate your situation b/c I already filed my own return, but I understand you should let IRS calculate the penalty and ask for a waiver. In fact, I searched and up popped a question here from a year ago, which you might find here:
The expert response to that question suggests you can put in your explanation there...I just cannot see this in Turbo Tax to confirm.