I am having a problem with an underpayment penalty being added to my taxes for a ROTH conversion with estimated taxes being paid in the same quarter as the conversion. I am a W2 employee with taxes withheld and paid every 2 weeks. I don't think that I should be paying a penalty if I paid the taxes on the conversion in the same quarter.
I had to enter the annualized income for both federal and state (Alabama), which were not easy. Turbotax thinks that I should still pay a $10 underpayment for federal and a $25 underpayment penalty for Alabama.
This process should be easier and be able to better account for ROTH conversions.
Is this an issue with the tax rules, or is it a limitation or weak point for TurboTax?
A little of both. Since you paid the estimate in the same quarter as the conversion then you can tell TurboTax to omit the penalties and then submit the returns with no penalties paid. The IRS (and Alabama) may decide that they don't need to collect the penalties.
Thank you for the reply RobertB4444!
I ended up calculating that I had already paid 99.2% of my tax liability for federal. Based on the explanation in the TurboTax help, I would not need to pay the underpayment penalty. For state, I am actually due a refund of almost $600. However, TurboTax states that I owe a $25 underpayment penalty.
That seems like a glaring mistake by Turbotax. Could we get an improvement on this kind of problem?
If not, for the amount of time required for me to enter the annualized income information for both federal and state (it would be nice if you only had to do this once) along with the price of TurboTax, I am really considering paying a CPA to do this for me for the same price.