Sold home in November 2024 and got hit with underpayment penalty even though paid more than enough in estimated taxes

[VaBluebell]

I am helping my parents with their taxes. They pay estimated taxes throughout the year based on what their financial advisor tells them.  In November 2024 they sold the large home they had lived in for 40 years, and owe tax on $126,000 of capital gains.  They paid a large amount of estimated tax to cover this in their fourth quarter estimated tax payment, to the point where they are due a $5500 federal refund.  However, TT has calculated a penalty payment for them which I don't think would apply since that money didn't come to them until late November and they didn't know they'd be selling their house until a month before that, hence they didn't make estimated tax payments to cover this until the sale went through.

Can we get rid of this penalty payment for both their federal and Virginia taxes?

Thank you.

[MindyB]

Yes, based on this information, there is an opportunity to reduce/eliminate the penalty.  You can annualize the tax. Here is how to enter the information in TurboTax Online:

1. Navigate to Federal > Other Tax Situations > Additional Tax Payments > Underpayment Penalties > Start or Revisit
2. Continue through the questions until you arrive at the screen Annualized Income Method, answer Yes, and Continue on the next 2 screens
3.  Enter the what you earned in the first 3 periods on the screen Annualized Adjusted Gross Income, ensuring the amounts are cumulative for the year. 
4. Similar to step 3, on the screen Itemized Deductions on Schedule A enter the what your deductions were in the first 3 quarters, ensuring the amounts are cumulative for the year. 
5. Continue with the process for the following screens until you reach the Conclusion, which needs to be unchecked if you want to see the results.
6. Continue through the interview, answering the questions, until you reach Underpayment Penalty, which tells you what the underpayment computed using the annualized method is.

See also: Why am I getting an underpayment penalty if I'm getting a refund?

[VaBluebell]

Wow, thanks for the quick reply, Mindy! I will go over to their home tomorrow to try this.

One question though. You say to enter their earnings for the first 3 quarters - their earnings are from social security payments and their 401k.  Should we take the total payments for the year and divide by 4, then enter that amount for each quarter's earnings? If so, do we do the same for deductions (they take the standard deduction)? I hope this question makes sense, considering I can't see their info until I get over there tomorrow.

Thank you.

[MindyB]

You're welcome.  It makes sense, and yes, if you know certain things are consistent every month, you can use that method to figure them, with a slight change- figure based on months because the quarter 1 estimate is based on income earned from 1/1-3/31, while quarter 2 is based on income earned from 1/1-5/31, and quarter 3 is based on income earned from 1/1-8/31.  

If their income varies, for example if they don't make consistent 401(k) withdrawals, you'll need to be precise and verify the dates they received their income.  

Also, you'll be asked for their adjusted gross income for each period, so that will be the total of all the income that is reported on their 1040, line 11 (don't deduct the standard deduction).  You'll next be asked about the capital gain, if the home was the only capital gain, you'll not enter anything there, and the amount will be assigned to quarter 4.

You will not be asked to enter the standard deduction, it's automatically added to the penalty form (Form 2210)  page 3, line 7.

[VaBluebell]

Thank you for clearing that up for me, Mindy.  I'll give this a try.  Appreciate your help!

[jtm345]

Hi Mindy, I'm back again.  I went back to my parents' home today and was able to get rid of the federal penalty with a few steps before it got to asking about annualized income (I had to go back to their 2023 return to get some numbers.  So the federal is all set.

Still having trouble with Virginia, though. Yesterday before I wrote to you I had tried going in to the Virginia return to get rid of the penalty, and got to a page where it asked about annualized payments, so I put in the estimated tax payments they had made for the first three quarters (that's all it asked for). The next screen asked for their income for the first three quarters and at that point I backed out because I wasn't sure how to respond. 

After clearing up the federal today, they also no longer owe a penalty for Virginia. However, when running the Smartcheck for Virginia, I got a screen showing the form 760C and saying that the annualized payments must be less than or equal to the actual payment.  It shows right on the form that the annualized payment I put in is equal to the actual payment, and I can't figure out any way to get rid of this "error." I tried to find my way back into what I was working on yesterday when trying to get rid of the Virginia penalty, but couldn't.  

Any ideas on how to get rid of this error message (which really doesn't seem to be an error)? I seem to have made things worse.

[VaBluebell]

Whoops, Mindy, that note above from jtm345 is actually from me.  I was still signed in to my dad's account.  Sorry for the confusion.

[BrittanyS]

If the amount is correct will it let you bypass the check and click file to proceed or does it keep looping back around to the state error?

@VaBluebell 

[jtm345]

Hi Brittany, thank you for the suggestion.  I will be going back to their home on Friday and will try this then. I can see from looking at old Community posts that there have been problems with the Form 760C in the past. I'm hoping I can get by this but if not you will be hearing from me! Thanks.

[VaBluebell]

Once again I was signed into the wrong account. Sorry, that above post is from me.

[VaBluebell]

Today when I opened the file I saw an option to delete that Form 760C, so I did.  Then I went into Virginia again and it generated a new one, with no problems this time.  Was able to run through SmartCheck with no problems this time. Thank you @BrittanyS and @MindyB for your help and guidance.