Having an issue with an underpayment penalty.
Doing my taxes step by step. When I enter ALMOST all of my income, deductions, credits, etc. I have an Federal Tax DUE, but NO penalty
However, when I then enter a very large capital gain (that occurred in December and is ~1/3 of total AGI), AND I enter the corresponding estimated tax payment that I made in December (that more than covers that additional tax from this gain, so much so, that I now have a refund), but I now DO have a penalty....
How is this possible? I was good to go with no penalty, got a gain late in year (and made corresponding estimated payment as soon as I knew about it), but now have a large penalty.
I tried the Annualized Income Method, and it came back with the same penalty. Added in the Actual Withholding method, and it reduced it some but not entirely.
Two questions:
- What am I missing? per my description above, I paid the taxes either through withholding or estimated tax payments, as my income occurred. Is there any other way to try to reduce penalty?
- Even if I hypothetically paid the entire estimated tax payment in Q1, the penalty is still there. But again, I'm getting a refund.... so what could I have done differently to avoid the penalty?
From your post, it appears that even with your estimated tax payment the total tax withheld and estimates paid were insufficient to prevent an underpayment penalty due to your large capital gain in December, If your estimated payment was larger then you would not have incurred an underpayment penalty.
The U.S. tax system operates as a pay-as-you-go system. What this means is that you must pay your taxes as they occur. For example, If your estimated tax payment for the first quarter is less than the amount required for the income earned you will incur an underpayment penalty. This penality is not deleted by any future estimated tax payments even when the estimates exceed the minimum required to avoid a penalty for the quarter.
The U.S. tax system operates as a pay-as-you-go system. What this means is that you must pay your taxes as they occur. For example, If your estimated tax payment for any quarter is less than the amount required for the income earned you will incur an underpayment penalty. This penality is not deleted by any future estimated tax payments even when the estimates exceed the minimum required to avoid a penalty for the quarter.
No, and no. Did you read my post? To use your words, I paid as I went, in the same time period. Per my post, my test case of paying 3 quarters early, still didn't fix it. I did all the moves that TT allows for, and it still shows a penalty.
Please, try again.
And on form 2210, line 6, it says DON'T include estimated payments. So, even if I've put every dollar of income to withholding, it would still give a penalty.
the easiest but maybe costliest way to avoid a penalty is that withholding and timely estimated tax payments must equal the lesser of 90% of current year tax or 100% of prior year tax (110% if your prior year agi is over $150K).
under the annualized installment method withholding can be allocated to the actual period it occurred.
the safest method is the prior year tax route. no guessing as to 90% of current year tax but if you have a lot of taxes in the prior year that you won't have in the current year you'll be letting the US Treasury hold your money tax free for an extended period. there is something some taxpayers can do if they can control their withholding. don't pay the estimates. near year-end increase withholding so you meet the 100%/110% test
alternative pay the first couple of estimates and then determine if the others are needed.
Hey, did you really end up paying a penalty ? I am in the same boat.
seems generally you are following the right process, and using form 2210 to communicate the back-loaded tax liability and corresponding estimated tax payments. I am going thru same process for a Roth conversion and managed to minimize the penalty but not eliminate it because of underpayment in Q2 which can't be fixed in Q4. Without seeing all the details it's probably hard for anyone to explain why you are still getting a penalty for your situation. In the TT forms there should be a page "2210 Penalty" which shows how the estimated tax payments are being allocated against the required installments to calculate the penalty, I found this helpful to explain the residual penalty.