Underpayment Penalty

[Comptonwoods]

My return shows I owe an Underpayment Penalty of $26.  This is a result of under-withholding by $132 on a Total Tax of $21350.  Is this correct that I owe a $26 penalty on less than a 1% miss on withholding?

[SteamTrain]

On the face of it, that doesn't seem right..

BUT

IF, in addition to your withholding,  you made any separate Quarterly Estimated tax payments late in the year  (fewer than 4 payments) , or made 4 unequal Quarterly Estimated tax payments during the year, that penalty could easily be correct, based on the initial default calculations used.  If this is your situation, you could "possibly" reduce the penalty by running thru the Annualized Income method (form 2010AI )  , But that's a pretty painful process and not likely to be worth the effort for $26.

[Comptonwoods]

During the year we made four quarterly estimated payments.  800,800,800, 4000.  The last was higher as we then knew what our capital gains hit would be.  

[HelenC12]

You could try and reduce the penalty by using the Annualized Income Method.  

See the instructions below.  Keep going, and when you get to the Annualized Income Method screen, answer Yes if you want to see if we can reduce the penalty.

We'll automatically generate a Form 2210 if your return needs it. Or you can revisit this section:

1. Sign in to TurboTax and open or continue your return.
2. Search for underpayment of taxes.
3. Select the Jump to link in the search results.
4. The Underpayment Penalties screen will display the penalty amount. Select Continue to review this section and make any needed adjustments.
   • Note: If you see No Underpayment Penalty, you either haven't entered your income and/or estimated tax payments yet, or you aren't subject to an underpayment penalty.

Source: TurboTax FAQ

[SteamTrain]

@Comptonwoods 

Yep...that, in some situations, would do it.

The initial calculation that is done, by default, assumes all your income is earned evenly over the year, and used you withholding as being paid evenly...and Estimated taxes paid...as being paid on the dates you entered.  Thus some of your cap gains in December are divided up over the entire year, and the taxes paid for those quarters may show up as a slight underpayment for some, or all of the first 3 quarters.

BUT, this is the default calculation...automatically done to eliminate a few million of taxpayers from the underpayment penalty, if this initial calculation ends up still being OK.

________________________

For those who still show an underpayment penalty, they can go thru the Underpayment Penalty calculations on the "Other Tax Situations" page 

But if you are using the desktop software....save your real tax return to a test file using "Save-As" , and then try out the "Annualized Income" method on that test file first.  It's painful and requires a lot of detailed data about all your income, deductions & credits for the entire year...  Since your extra income occurred in the last quarter, it would likely eliminate the penalty.  BUT, plan on spending a whole day this weekend working it out.....like I said, maybe not worth the effort. (AND, the quarters are 3mo, 2mo, 3mo, and 4mo)  IF it gets too messy, then you can abandon the test file and just go with your original as-is.