Underpayment penalty not working for California?

[avian099]

I have an approximately $800 underpayment for California state taxes.  Originally it said I had a penalty but then I answered questions about last year's taxes and now there is no penalty.  I don't think I meet the safe harbor rules but last year I did get a refund.  The 5805 form is not included in the forms that I need to send to the California FTB but I did look at the form and it shows "penalty exception 1 $500/250".   However when I manually input my information into the form and do my own calculations I seem to have a very small penalty of about $9 so is this why the form is not included because this is a very small amount or is there a bug of some kind.   I revisited the underpayment section, deleted and input the same information few times and still no penalty fee. Also is tax liability defined as what you owed throughout the year or what you owe after you complete tax forms.  I assumed that liability means what you owed throughout the year.  

The program did create estimated payment vouchers but rather than using these I increased my withholding which I believe is acceptable.  I will be earning a lot less this year than  last year. 

Thanks. 

[DawnC]

 Tax liability is the total tax you owe for the whole year.   (Line 24 of Form 1040).  It represents the total tax obligation after applying deductions and non-refundable credits, but before subtracting payments made via withholding or estimated payments. 

If you have a tax due of less than $500, you meet exception #1.   You must make estimated tax payments if you expect to owe at least $500 ($250 if married/registered domestic partner (RDP) filing separately) in tax for 2025. If in the prior year your tax liability, less any credits for the prior year, was less than $500 ($250 for married/RDP filing separately) you are not subject to the underpayment of estimated tax penalty.   CA 5805 Instructions

[RobertB4444]

That underpayment penalty is based on when you made your payments and when you earned your money.  The system has estimated - based on your answers - that the FTB will not charge you a penalty this year.  It is always possible that you will still get a letter from them looking for a 9$ penalty but I would let the system do it's thing and see what happens.  You almost certainly don't owe a penalty.

As far as estimates vs increased withholding - increased withholding is better than estimated payments.  The IRS views withholding as having been paid equally over every day of the year so there is never a question of timely payment.  As long as your increase in withholding covers the amount that you would have covered with estimated payments you're definitely ahead.

[avian099]

Thanks. So even if I don't meet the safe harbor rules if I had a refund last year I do not have to pay a penalty.  It is somewhat confusing, IMO.  The taxes I owe to the state this year are more than $500 as I indicated in my original post.  

[avian099]

Thanks. Ok then I guess I should leave things as is and not manually fill in form 5805.  The money I received and withholding taken out was approximately the same monthly throughout the year. 

As for withholding I made sure that the increase is equal to the total of the estimated payment vouchers.

In fact it's slightly more. This is the first year I have owed an amount like this to the state so I have never had to deal with underpayment or vouchers before.  

[avian099]

@DawnC  @RobertB4444 Here's where I actually need clarification.  Last year my tax liability was about $2500 and I had paid in more than that so got a refund but to me this does not meet the $500 liability limit in exception 1.   That's why I wanted to know if by liability they meant what you might still owe once you complete your taxes or if it means what you owed altogether.  I wasn't liable for anything additional last year and as I indicated got a refund but the total tax on line 64 of the 2024  540 was about $2500. 

[RobertB4444]

Penalties are charged on the amount that is owed after your payments are applied.  If your payments are made timely and equal or exceed your tax liability then there is never a penalty.  If your payments are not made timely or you owe taxes then there may be a penalty assessed.  

In this instance the amount that you paid in is seen by the system as enough to avoid a penalty.  If the system is wrong you will receive a letter in the mail from the FTB.

[avian099]

Here is the exception from form 5805: "The amount of your tax liability (not including tax on lump-sum distributions and accumulation distribution of trusts) less credits (including the withholding credit) but not including estimated tax payments for either 2024 or 2025 was less than $500 (or less than $250 if married/RDP filing a separate return).

The withholding credit is part of what is deducted to determine the final tax liability from the prior year and if it is less than 500/250 then one does not need to deal with an underpayment penalty.