Underpayment Penalty

[TaxPayer2025]

Although I was massively over-withheld for the first half of the year, I fell behind in the 3rd and 4th quarter and  ended up getting hit with a big late penalty.  I was able to lower it somewhat by using the actual payments rather than the deemed equal installments but it is still pretty large. I noticted that over half of the penalty was being generated by the 4th quarter underpayment which Turbo tax seems to default to being paid when the return is due on 4/15/25 (90 days at 7%).  However, I ended up getting laid off at the end of the year and received a severance package in late January which included a large amount of tax withheld - Way more than the amount of my underpayment.  Unfortunately, the payment wasn't made until January 17 (after the 1/15/25 due date for the 4th quarter) so it is not reflected on the Form 2210 which only picks up payments through the due date.  

I realize the January withholding is supposed to be for the severance payment, but shouldn't the payment be applied to the prior taxes that were due for 2024 first?  That would result in my underpayment only being 2 days late rather than 90 days late.  I know that could leave me underpaid for 2025, but there is still a lot of time left in the year and as long as I meet the safe harbor by the end of the year, it shouldn't matter. 

Is there any way to address this in Turbotax?

Any help would be greatly appreciated!

[baldietax]

I don't think there is much you can do to apply 2025 withholding against 2024 tax, it will be on your 2025 W2.

So it sounds like you only paid tax thru withholding and no estimated tax payments for 2024, but the withholding was variable and not enough to meet safe harbor?

There is probably not much you can do to reduce the penalty in this case I don't think Annualized Income method (see interview questions under Other Tax Situations / Underpayment Penalty) will provide any relief as withholding is already treated as evenly applied against the safe harbor quarterly requirement.  The more typical situation where annualizing helps is an unexpected tax event late in the year (e.g. Roth conversion) accompanied by a one-time estimated tax payment.

Not a CPA/Expert just my thoughts based on what you've described.

[Vanessa A]

No.  Your withholdings do not go to the older balance first.  If your employer withheld the money from your severance pay in January of 2025, the withholdings will apply to your 2025 taxes.

If you personally made the payment through the IRS site, then you would be able to allocate the payment to go to your 2024 tax year, but since it was withholdings, you cannot do that.

It is similar to people owing back taxes but still working.  They apply the amount the employer withholds to what they are currently making not what was owed in the past.  If you have a refund due from the IRS they will apply it to past debt.