TurboTax Premier Incorrectly Calculated Underpayment Penalty Using Annualized Method

[jstroebel]

I received a large chunk of my AGI in December 2024 from Required Minimum Distributions from tax free accounts (another thing that sucks about being in your 70's).  As a result I was under withheld and was being charged an underpayment penalty of over $1,000.    I figured this was exactly the situation that was meant to be addressed by using the annualized method (actually inputting when you received income as opposed to assuming it was equally spread throughout the year), so I went back to segment of the interview when the tax underpayment penalty was calculated and elected to use the annualized method.  The interview then required me to allocate my received income into three periods--1/1-3/31/24; 1/1/-5/31/24 and 1/1-8/3124.  I had to do this not only for ordinary income but also for Short Term Cap Gains, Long Term Cap Gains and Qualified Dividends.  I also had to allocate certain taxes paid (Medicare Taxes, Foreign Taxes) among these periods.  Assembling all this data was a fair amount of work--but at the end of the process, TurboTax was telling me there was no difference in my underpayment penalty--still over $1,000.  I said this cannot be and decided to delve into the forms.  

When I looked at the Form for calculating the underpayment penalty (Form 2210) on the first page of the Form in Part II there is a box to be checked "If your income varied during the year and your penalty is reduced or eliminated when figured using the annualized income method.  You must figure the penalty using Schedule A1...".   This box was not checked.  I then navigated to Schedule A1 to Form 2210 and observed that none of the information on actual payment dates of income and taxes that I laboriously entered into the interview had been carried to the schedule.  So I proceeded to manually re-enter the information in the appropriate boxes on the Schedule.  Voila, my underpayment penalty was reduced by over $500.

It would appear to me that this is a programming glitch which is failing to transfer the information I entered in the interview to the Schedule.  This is a fault in the program which was going to cost me real money.

Of course, there is no one to talk to at TurboTax to point this fault out to--so Buyer Beware.

[crash345u]

I am very interested in hearing TT response to this problem.

I am wondering if you had withholdings equal to 100% of last year's tax obligation if it would have avoided the penalty. That assumes the IRA custodian allows you to specify sufficient withholdings.

[DaveF1006]

Generally, if you had withholdings equal to 100% of last year's tax obligation, you might have avoided the underpayment penalty, provided your adjusted gross income (AGI) was $150,000 or less. The IRS allows taxpayers to avoid penalties if they pay either 90% of the current year's tax or 100% of the prior year's tax, whichever is smaller.

However, if your AGI exceeded $150,000, the threshold increases to 110% of the prior year's tax. Additionally, the IRS requires estimated tax payments to be made quarterly, so even if you met the withholding requirement, timing could still impact whether a penalty applies.

Your IRA custodian's rules on withholding are important here. Some custodians let you set withholding amounts, while others may have limits. You need to contact them to find out what their policy is in regards to setting your withholding amounts. 

Underpayment of estimated tax by individuals penalty

@crash345u 

[jstroebel]

Thanks.  Yes, I am aware of the IRS's requirements on withholding.  Believe it or not, I am 74 years old and have never filed estimated tax returns.  When I was working all my income was W-2 and was withheld by my employers.   Since I have been retired I have continued not to file quarterly estimated tax payments and was mostly happy to pay underpayment penalties of a couple of hundred dollars at the end of the year to avoid having to file multiple tax returns.  But this year the penalty was over $1,000 because of the December RMD's.  

The reason for my posting was to point out that the TurboTax program was not working property.  When I went back to my return and re-did the part that dealt with the underpayment penalty and went to all the trouble of annualizing capital gains (long and short term), qualified dividends and my ordinary income into the three mandated periods. I was dismayed to learn that TurboTax was still showing the same penalty.  As I said in my original post, this was apparently because the new data that I input to annualize my income was not being carried from the interview onto the tax forms.  When I did this manually, I got a quite different result and saved myself about $600.  THE PROGRAM IS NOT WORKING PROPERLY AND SOMEONE AT TURBOTAX SHOULD LOOK INTO THIS.