Turbo tax underpayment penalty

[ggont]

Hello, 

I used Turbo tax premium and while I was going over the federal tax it popped up that I owe an underpayment penalty. I was shocked since I haven't seen or heard of it before. It prompted me to answer some questions and it went away, HOWEVER I am not sure I understood the questions...

So I understand that you need to pay your taxes as you go. My main source of income is W2 where the company does the tax withholding, however 2023 and 2024 I received interest income which increased the taxes I owe by 30% more than what was withhold. 

Is this a scenario that I broke the underpayment law? How could I have estimated the income since interest rates change. How can I prevent this from happening? Ask my company to withhold more taxes?

When it comes to the questions I answered, I spoke with a Turbo tax specialist to review them but they are gone... We couldn't find anything in the tool about an underpayment penalty.

I think one of the questions was :

You paid 90% or more of the tax that you owed for the taxable year or 100% of the tax that you owed for the year prior, whichever amount is less.

What is the meaning paid 100% of the taxes that I owed the year prior? I though this means that at the end of year I paid all my taxes and don't owe anything. Does paid mean paid so far ie withhold? 

https://www.investopedia.com/terms/u/underpaymentpenalty.asp#:~:text=Typically%2C%20underpayment%20p....

[Vanessa A]

Technically, yes, "you broke the underpayment law." 

If you have interest income that is extremely unpredictable, you can do a couple of things to not have to actually pay a penalty next year.  As you mentioned, the one way to avoid the underpayment penalty is to pay 100% of your tax liability....this means in the prior year.  This does go up to 110% if you make more than $150,000 a year.  What this means is, if you look at like 16 of your 1040 for 2024 and it says $12,000, then you would need to pay $12,000 (Or $13,200 if you make over $150,000) in 2025 to not have a penalty.  You would answer the penalty questions again like you did this year but you would not pay the penalty.  Pay as you go means every quarter, not just once a year. If you do it perfectly, then you would not owe anything at the end of the year when you file your taxes. 

You can increase the taxes you have withheld by updating your W4.  If you owed taxes this year and you do not want to pay a penalty, then it would be a good idea to divide the amount that was due to the interest by the number of pay periods you have and have that amount withheld as an extra withholding. 

You can also choose to make estimated payments when you get the interest payments instead of having more withheld at work.  Depending on how much interest you are earning, you could send in 30% of what you get as an estimated payment if this is how much extra you paid.  This may allow you to hit that 90% mark as well or even the 100% of 2024.  

Depending on why you are not having to pay the penalty, you may or may not have form 2210 in your return.  This would be the form that requests the waiver from penalty. 

[ggont]

Thank you for explaining very well. I also went to my company's w4 and saw there is an option to add additional income. 

• Now in my current situation, since I didn't understand the questions and said yes that I paid 100 of my previous year which I didn't  should i ask turbo tax to remove the 2210? And what then? Will irs calculate my penalty or turbo tax? It was 216 if I remember correctly.

[MaryK4]

You would not owe the underpayment penalty if you paid 100% of the 2023 taxes (or 110% if your AGI was >$75000(single)/$150000(joint)).  The payments would still  have to made throughout the year so W2 withholding usually works for qualifying.  TurboTax automatically calculates this if you used in in the prior year, or you can enter the taxes liability.  

You can go to Other Tax Situations under Federal and Review the Underpayment Penalties (it will be under Additional Tax Payments if it is not already on your list) and answer the questions correctly.  If the 2210 is needed, TurboTax will create it so you can file.

@ggont