TurboTax Premier Incorrectly Calculated Underpayment Penalty Using Annualized Method

[DawnC]

Try deleting Form 2210 and/or 2210AI and then go back through the penalty interview.  @jstroebel   @ct8889 

How to delete forms in TurboTax Online

How to delete forms in TurboTax Desktop

[ct8889]

I am using TurboTax online. Do you know how to fix it there?

[jstroebel]

At the moment (until TurboTax fixes the glitch between the interview interface and the actual IRS forms for calculation of the underpayment penalty), the only way I know around this is to go to the Forms themselves and enter the data manually.  Then the calculation seems to work (at least the answer changes and the penalty is lower--mine was cut by half.

So, go to the banner line at the top of the screen and select Forms.  Then you will see a list of the IRS forms in the left-hand column of the page.  Scroll down to Form 2210 (the Underpayment of Estimated Tax Form).  If your experience is like mine, you will find that a lot of the form has already been filled in from information you entered in the Interview process.  What wasn't filled in in my cases was Part II on the first page of the Form.  I was surprised to see that box C ("Your income varied during the year and your penalty is reduced or eliminated when figured using the annualized income installment method...:"  Check this Box.  You will note at the end of this statement it tells you to go to Schedule A1 to Form 2210.  Then either "Quick Zoom" (whatever that is) to Schedule A1 or just select that Schedule from the left hand column listing all the forms.  Once you get to this form, you will again find that all the information you painfully calculated and entered in the Interview process, has not carried to the form.  Enter this information in the appropriate places on the Schedule (I think the only information that you will have to enter are your annualized AGI (line 1) and annualizing your capital gains in the Capital Gain Computation Smart Worksheet.  The rest of the information on the Form will be filled in for you.  Toward the end of the Schedule  (line 27) you will see the calculations which you need to carry over to Form 2210, Part III, line 10.  I believe again you will find that once you have completed Schedule A1, most of the required information is already carried over to Form 2210.  Again, this resulted in my calculated penalty being reduced by half.

[baldietax]

I'm not saying there isn't some issue in TT if multiple people are experiencing a problem.  But for folks going through this process, one thing to beware of having gone thru the interview process there is a question at the end whether you want to adopt the AI method which defaults to NO by checking the box and you have to uncheck that box to apply the method.  It's very confusing and seems easy to undo all the work that was done.  Personally I had no issues with the AI method via the interview screens, using Mac Desktop / Premier version.

[royper]

The method below can also help to clarify how to use the annualized method for 2024.  Just ignore anything about 2025 and you should be fine.

I have found a way to use 2024 (previous year as we are in 2025) Turbotax to get a rough idea of the estimated tax payments I need to make in 2025 (current year) to minimize my tax penalty when my 2025 income is expected to be UNEVEN.  I’m not sure, but I think that the 2025 estimated tax payments generated by ttax 2024 is based on the assumption that your total expected income in evenly distributed throughout the year, as does the IRA. This can lead to a large penalties if your income is significantly larger in certain quarters.  You can use also this when you expect to get 2025 W2 income together with uneven 1099 or other income.  This method presumes that tax rates will not drastically change from 2024 to 2025.  You are only looking for an estimate of possible penalties of +/- ~$100 in penalty.

If there is a simpler way, let me know and I’ll kick myself :).  If there is an issue with this method let me and others know.  As I finished this, I realize it’s too long and no one will likely read it!  I wanted to explain this to myself.

I do this because my projected (current year) 2025 income is a result of quarterly ROTH conversions that change depending on how my investments and market is doing.  I’m retired and need to convert as much of my IRA to ROTHs before 73 to minimize taxes from RMDs. 

There are three key steps:

1.  Using the step-by-step mode REPLACE ALL 2024 income in 2024 turbotax (previous year) with your EXPRECTED income for 2025 (current year).  I start with this as it has all my info but you can start a new 2024 return if you prefer. You can do this in the step-by-step mode by just replacing the 2024 income in the “wages and income section”.  You can use this method if you have W2, 1099 or interest and div income.  You are basically creating a MOCK 2025 tax return using the 2024 ttax program.
   
   
2. Add any 2025 data to the “Deductions and Credits”
   
   
3. After you do this the next key step is to use the step by step mode and go to the “other Tax situations”  -> “Additional Tax Payments” -> Underpayment penalties and hit update. At some point it will ask “Do you want to annualize your income?”
   
   
4. Answer yes.   When you go through this you MUST enter your total previous year 2024 tax, in the “2023 (previous year) Tax Liability” box. The 2023 year was entered automatically imported by TTax because you are using the 2024 ttax you filled out in 2025.   You want to use PREVIOUS year (2024) because you are faking the 2024 ttax program to estimate the penalties for the current year (2025) based on projected income.
5. I know, this can be confusing!   At least it was to me.
   
   
6. Next add your (previous year) 2024 adjusted year gross income in the “2023 AGI” box.  These two, total tax and AGI of from previous year (2024) is needed for the annualization calculations to determine the (current year) 2025 estimated tax payments to avoid penalties.
   
   
7. Answer yes to “do you want to annualize your income”
   
   
8. Next add your CUMULATIVE 2025 (not 2024) income for Q1, Q1+Q2, Q1+Q2+Q3 in the three input boxes under “Annualized AGI”.  The fourth box will already be filled in from the total 2025 PROJECTED income you added earlier.  The last box will automatically be Q1+Q2+Q3+Q4 income if you had added ALL PROJECTED 2025 income in the income section.  Note that IF you have steady w2, and interest income, etc., these also need to be cumulatively added in these boxes as they are generated PER QUARTER along with any 1099-misc income in each quarter.  THIS IS KEY. 
   
   
9. IMPORTANTLY, before you start determining your estimated taxes needed to avoid penalties in 2025, IF you have significant tax that you expect to be WITHHELD in the current (2025) year (e.g. from a W2) (BUT NOT PAID AS ESTIMATED PAYMENTS) then you will need to go directly to Form 2210 to add that. This HAS to be done in the form 2210 itself, using “view Forms” as I could not find a way to do this in step-by-step.
   
   
10. You may see forms 2210, 2210 Penalty and 2210AI forms listed under “forms in my return” in view form.  Form 2210AI will have the cumaltive income you added in the step-by-step and form “2210 penalty” will show any expected penalty.
    
    
11. Determine the projected CUMULATIVE quarterly tax you expect to be WITHHELD from any W2 income (you need to estimate these) AND check box D in Part II of the form 2210 in view forms.  You add this cumulative (WITHHELD only) tax to the boxes under “Part II, Line D - “Tax withheld Smart Worksheet”.  Any significant interest income from savings accounts and div, I typically estimate by dividing the expected totals by 4 (for 4 quarters) and add that those cumulatively to the boxes in this section.  This not 100% accurate but you are trying the get estimates for 2025 so it is OK.  I actually used this w2 and interest income estimation method in my actual 2024 ttax to determine my tax penalty using the  “annualization of income” method as I didn’t want to go through each quarter reports for the int and div.  Those were small anyway but we will see what the IRS thinks.
    
    
12. Continue and at “Conclusions” UNCHECK that box that says “Do not use the Annualize your income”  Not sure why this box is checked by default.
    
    
13. Add the date you expect to pay the your balance of taxes due (.e.g, 4/14/2025)
    
    
14. NOW FINALLY you are ready to determine your 2025 estimated taxes to pay in order to avoid or minimize penalties.  Note that your PROJECTED ESTIMATED (NOT withheld from e.g, W2) tax payments for 2025 that you guess need to be made are added in the “Tax Payments Worksheet” that you access via “View Forms” => “Tax Payments.”
    
    
15.   At this point, you will go through an iterative process whereby you enter various 2025 estimated tax payments AMOUNTS as well as WHEN you pay these with the objective of minimizing any penalty for late tax payments in 2025. Note that when you add your estimated tax payments, you will use dates using the dates 4/14/2024, 6/15,24,  9/14,2024 and 1/15/2025, even though you will actually be making these payments in 2025 and 2026.  I know it can be confusing!.   Note that I pay as late as possible but you can any dates before the quarterly deadlines.  The reason for these 2024 and 2025 dates are that s you using the 2024 program.  If you use the actual 2025 and 2026 payments you will be making the program will not know what to do.  Remember you are using the 2024 program!
    
    
16. Under “view forms” =>  “tax payments” enter any test estimated payments for 4/14/2024,  /14/2024, 6/15,24,  9/14,2024 and 1/15/2025 and look at the penalty in Form 2210, line 19 as you change the amounts and when you pay.  If the program is propagating properly, then as you play around with the possible projected payments on the various dates, the 2210 penalty Form will appear in the “Forms in My Return” column if there is a penalty and disappear when there is none.  If this is not happening, then you can look at line 19 in Form 2210.
    
    
17. That’s it!!!!   You will see that both the amounts AND when you make them matters in whether you will be assessed a penalty.  I look to minimize AND delay payments while keep the penalty below $100.  I’m expecting to make large estimated tax payments.  I figure delaying and getting a small penalty is better than paying upfront.  Remember, none of this illegal, you are just trying avoid a penalty and minimizing and delaying payments as much as possible.
    
    
18. You can also shoot for zero penalty.  Remember, these are estimates with an accuracy of +/- ~$100 as you are using 2024 Ttax to guess at 2025 penalties.  I found that if you are making large uneven quarterly ROTH conversions that this annualized method can save you hundreds or thousands of $ relative to using the default, non-annualized method the IRA uses. 
    
    
19. Good hunting!