Underpayment of estimated tax penalties

[ronroberts]

Greetings,

I have some unplanned 4th 1/4 expenses coming up, which must be paid for out of my IRA. This will cause my estimated tax payments for the 1st 3 quarters to be lower than they should have been. I understand that form 2210 can take care of this. My question is more to do with how to avoid triggering the 2210.

It is my understanding that as long as my Fed tax owed (after subtracting out the quarterly payments) is under $1000 there will be no penalty.  So, with no penalty, is the 2210 still needed, or is that processed whenever there is underpayment regardless of the amount?

Should I even care? If Turbotax processes the 2210 without any work on my part then perhaps I should be concerned about it.

Also there would be underpayment of state estimated taxes and under the $500 threshold for penalties. Does TT handle state underpayment forms for CA. I believe it is form 5805. 

Main thing I want to avoid is having to put together information showing how much was received in each 1/4. My brokerage doesn't  provide the timing of distributions on their 1099s. I will not have documentation to show when income was received. 

Thanks!

[Bsch4477]

Read here. 
https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-how-to-determine-what-to-p...

Distributions and tax withheld from your 1099-R are assumed to have been issued quarterly. 

[dmertz]

Preparing Schedule AI of Form 2210 to annualize income to avoid underpayment penalties for the first three tax quarters would like require a substantial amount of work on your part.  As Bsch4477 said, these penalties can be avoided by having a sufficient amount of taxes withheld from your IRA distribution since, by default, the tax withholding is applied evenly to all four tax quarters, making up for what would otherwise be underpayment for the first three quarters. 

If you would need to take a greater IRA distribution to cover the taxes because your original plan might have been to use early 2025 income to pay Q4 estimated taxes, that might mean an increase in 2024 taxable income.  However, you could potentially use that early 2025 income to roll over part of the 2024 IRA distribution within 60 days of the 2024 IRA distribution and avoid the increase in 2024 taxable income, but beware of the one-rollover-per-12-months limitation on IRA rollovers.

[ronroberts]

If I need to withdraw more than I had planned in my earlier estimated tax payment calcs, am I correct that as long as my underpayment for the year is under $1000 I will not need to be concerned about penalties? Eg. If my total taxes for the year come to $2000 and I payed $1050 in estimated payments, I am only $950 short and will not owe a penalty since I am underpaid less than $1000. 

Also does TT process form 5805 for CA underpayment.

Thanks

[Mike9241]

not quite.

if you look at form 2210 only withholding (line 6) not estimated tax payments count towards that $1000 max owed. if you look at the instructions for line 3 you'll see it does not include estimated tax payments.

[ronroberts]

Thanks @dmertz 

So to to make sure I understand, if my first 3 estimated payments were each less than 25% of my total tax liability for the year, I can take the withdraw from my IRA and specify a withholding amount that will make up for the underpayment of estimated taxes, such that the withheld amount plus the estimated taxes cover my total tax owed? 

When I make the large withdraw to cover the unexpected expenses in my first post above, I will have the custodian withhold enough tax to not only cover the withdraw but also make up for the shortfall of the estimated taxes, and the IRS will automatically spread the withholding over the entire year? 

No need to get into 2025, as all of this will take place in 2024. 

Also I'm still wondering if TT online basic covers the CA state 5805 along with the 2210 should it ever be needed.

Thanks in advance!

[dmertz]

Yes, if the Q1 through Q3 estimated tax payments were equal amounts and 3/4 of the the tax withholding would be sufficient to make up for the underpayment for Q1 through Q3, there would be no underpayment penalty for those quarters.  (The last 1/4 of the tax withholding would apply to Q4.)

I know nothing of CA Form 5805.