Underpayment penalty

Forum|Forum|4 years ago
April 10, 2022
4 replies
33 views

Why am I getting an underpayment penalty ? It's only $2, but this is the first time ever (20 years of filing jointly with my wife). We both have fixed salaries for the most part (with annual increases) and occasional bonuses. But curious on why now this is happening? Anyone else in this boat?

TMG92

Level 3

Did you pay more taxes during 2021 (via withholding and estimated tax payments) than you owed in 2020? If not, they can charge a penalty for underpayment. I usually do a back of the envelope calculation in the first week of January to see if my withholding and est. tax payments exceed the total tax I owed the previous year. If not, I make an extra payment in early Jan to cover it by at least $1.

emciverolo92Author

Level 2

Thanks for the response. So yes, we paid more taxes in 2021 than we owed in 2020. But that sounds like we should not be paying a penalty for underpayment???

TMG92

Level 3

Theoretically, if you paid your taxes "unevenly" throughout the year (not enough early on) or you earned your income unevenly throughout the year, an underpayment penalty could be assessed because the IRS thinks you didn't pay enough in a timely manner. I know, doesn't seem like it should be fair and the fee should be waived since you paid enough overall. Not sure if there's a way to get this waived now. Wish I could be more help.

sandy4042

Level 6

I know at some point in my spouse and my life...employment tapering down, investment income increasing, I had to start making estimated quarterly payments because the withholding from an employer wasn't going to cover it. Maybe you're reaching that point. I also opt out of withholding from investments so I do it myself with estimated quarterly payments. Or, you could just increase your salary withholding.

sandy4042

Level 6

I agree with @TMG92 and @VolvoGirl , using the annualized income installment method (Form 2210) may get rid of the penalty. I can see this working for example if you got an end of year bonus. TT and IRS by default will attribute income (including the bonus) evenly throughout the year. They will divide your withholding also evenly. If you didn't meet the required payments for 4/15, 6/15, 9/15 or 1/15 through withholding + any estimated payments, an underpayment penalty is calculated, even if you owe no taxes at the end, or are due a refund. By using Form 2210, you can assign the extra income at the proper time in the year, and avoid the underpayment for an earlier payment date when the extra income had not occurred yet. Though you might not want to go through the trouble for $2!

emciverolo92Author

Level 2

Thanks to everyone who replied to my question. I appreciate all the responses. So I went back and did find out that my wife did receive 2 significant bonuses in 2021 (Q1 and Q4). I'm assuming that this is reason for the underpayment penalty.