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