Underpayment Penalty

[Skives19]

I may have underpaid my federal and Michigan state taxes for 2021. I didn’t realize I needed to make quarterly estimated payments if I knew I would owe at the end of the year. The last quarterly estimated payment is due January 15, 2022. Is there anything I can do by then to avoid paying a penalty on my underpayment? 

I read the penalty is waived if I paid 100% of last years taxes. Does that mean if I paid my tax liability of last year in this years taxes. If so I paid 300 less this year (2021) in federal tax than last year (2020). 

[Mike9241]

estimated taxes are due on a quarterly basis. so paying 100% of your estimated taxes now will not avoid the penalties for the 1st 3 quarters. but read the following

There will be no federal penalties for not paying in enough taxes during the year if withholding
1) And timely estimated tax payments equal or exceed 90% of your 2021 tax
or
2) And timely estimated tax payments equal or exceed 100% of your 2020 tax (110% if your 2020 adjusted gross income was more than $150K)
or
3) the balance due after subtracting taxes withheld from 90% of your 2021 tax is less than $1,000
or
4) your total taxes are less than $1,000

state laws differ

[Skives19]

Number 2 is where I am confused. In 2020 we paid $6,668 in federal tax ($6,646 was due so s $22 refund). In 2021 we paid $6,498.20 in federal tax. I’m confused on whether I can make an estimated payment by January 15, 2022 of $300 I could avoid any or all penalties?

[AmyC]

I am assuming you believe this year you will owe more than $1,000 to federal. The associated penalty can be waived if you paid it at least as much as your tax bill last year, $6,466. Unless you are higher income, then you need to have paid in $7,311.

You may be able to avoid all penalties. See About Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts. You still have time to pay state and federal. Most states and the IRS accept payments online.

[Skives19]

Yes maybe $2,575 federal and $708 state. I haven’t made any estimated payments this year. Should I pay all the underpayment or can I just pay $300 to make it above what I paid in federal taxes last year (2020)? This is good as long as I do it by January 15, 2022 right?

[AmyC]

Yes, as long as you meet the Form 2210 requirements, you are fine. Pay the $300 to put you over last year's amount, unless you are higher income and need to pay more. See Make a Payment to pay.

[Skives19]

How does this work with a penalty on state underpayment? How do I need to pay the state to avoid a fee?

[DaveF1006]

You will need to send in a payment to your state by January 18, 2022 to avoid an estimated tax penalty. To make a payment, you will need a payment voucher to make your estimated tax payment. Here is a link to download the payment voucher to send in. 

[Skives19]

Do I pay all of the underpayment or how much?

[AmyC]

You need to follow the instructions from Michigan.gov:

The Michigan Department of Treasury follows the Internal Revenue Service (IRS) guidelines for estimated tax requirements. Based on the IRS estimated income tax requirements, to avoid penalty and interest for underpaid estimates, your total tax paid through credits and withholding must be:

• 90% of your current year's tax liability or
• 100% of the previous year's tax liability or
• 110% of your previous year's tax liability if your previous year's adjusted gross income is more than $150,000 ($75,000 for married filing separately)

Penalty is 25% for failing to file estimated payments or 10% of underpaid tax per quarter.  Interest is 1% above the prime rate.

[Skives19]

My underpayment may be from sports betting online. Does this make anything different as to what I need to do?

[AmyC]

You will avoid the penalties if you make a large enough payment now. If you have to go through and claim your income by quarter, it could be worse depending on when you won what. Not to mention, a pain to sort all income by each quarter.

[Skives19]

Thank you for your help. 

how will they know what quarterly  payment I am making? Should I make 4 payments that equal what I may owe to both the irs and state?

[Vanessa A]

The payment you make now cannot be assigned to a specific quarter.  You only need to make one payment to the IRS and one payment to the state.  Both payments will be applied to your overall taxes paid, but you cannot go back and say this payment was meant for the first quarter and this payment was meant for the second quarter. Payments are applied in the quarter they are made.

If you do receive a penalty you can file form 2210 with your federal taxes to request the penalty be waived. This form is found by clicking>> Other Tax Situations>>Additional Tax Payment in TurboTax.  If you file this form you will need to print and mail your return as it cannot be e-filed.

For your Michigan state return, if you incur a penalty, you would need to Request a Penalty Waiver from the state by following the instructions in the link. 

[Skives19]

Will turbo tax be able tell me if I am getting a penalty and how much it is or do I have to wait for the IRS and state to decide?