Underpayment Penalties

[rvoelkli]

I received a notice in turbotax: "You have a penalty of $XXX for underpayment of your estimated taxes. The balance due on your return includes this penalty." 

Question - I did not sell any investments this year, it is just my W-2, however, that includes stock grants that increased by income. Why am I being penalized for that?

[DianeW777]

The IRS tax system is pay as you go, so when you received the stock grants you may have needed to pay estimated tax to cover.

There is an annualized method available if you received this in the last quarter of the year which could lower the penalty.

• What is Form 2210?
• How do I add Form 2210 in TurboTax?

Generally, you can avoid the penalty if your total timely estimated payments and withholdings are greater than or equal to the lesser of:

• 90% of the total tax after credits for the current year, or
• 100% of the total tax after credits in the prior year
• See one exception below.

You can also avoid the penalty if the amount you owe is less than $1,000 as long as any estimated tax payments you made are timely.

Note: High-income taxpayers. If your adjusted gross income (line 11 of your 2023 Form 1040) is greater than $150,000 (or $75,000 if you're married and file a separate return from your spouse), you can avoid a penalty by paying at least 110% of your total tax from the prior year.