Underpayment penalty

[emciverolo92]

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]

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.

[emciverolo92]

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]

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]

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.

[TMG92]

So, did you make quarterly estimated payments over and above your withholding? If not, then this won't apply to you, but sometimes I've found if you look at the estimated payments worksheet where is shows when you paid your quarterly payments and how much, TurboTax gets this wrong and if you adjust the payments and dates, the penalty is no longer relevant because now TurboTax knows how much exactly you paid each quarter and stops assuming you paid the same. This would apply if you earned a big bonus or some income one time during the year and paid extra taxes at that time to cover it. Anyway, as you mentioned, it is $2 so not sure how much effort you are going to put in to figuring out where the calculation is going wrong. I have seen some people saying their penalty is over $450 and they are getting a refund! Not sure what is wrong there but hopefully they can get it figured out.

[VolvoGirl]

I once had a refund and still had a penalty for not paying in evenly.

You might be able to eliminate it or at least reduce it.  You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you.  It's form 2210.

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

If you have the desktop program you can switch to Forms Mode (click forms in the upper right (left for Mac)) and open the 2210 form.  If the 2210 doesn't show up in the left column, click on Open Forms at the top of the left column.  Type 2210 in the search box and open the 2210 form.  Check box C to let the IRS calculate it.

aaa

[sandy4042]

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!

[emciverolo92]

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.