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frankt
New Member

underpayment penalty

Sold stocks in Sept & Oct. and paid estimated taxes in Q4.  Did a ROTH conversion in Dec. and paid estimated taxes from outside the IRA account.  Tax summary shows I will need to pay estimated penalty taxes for Fed and state taxes (even when I show excessive overpayment amount)?

1 Best answer

Accepted Solutions
jtax
Level 9

underpayment penalty

Congrats. Doing a Roth conversion and paying the tax with non-IRA money is one of the best financial moves you can make.

 

But this is one of the more confusing things about taxes. 

 

What is probably happening is that the default calculation is working off an even income model. So you are required to pay roughly 1/4 of you annual taxes each quarter. In essence, by that method, your April, June, and Sept payments were very late.

You can fix that by going through the Annualized Income
Installment Method described on page 6+ of 

 

https://www.irs.gov/pub/irs-pdf/i2210.pdf

 

[this seems to be the 2018 form instructions, the IRS hasn't updated it, but it will all apply except for the dates]

However that is extremely complicated and confusing. It involves something close to redoing your taxes for each period. Well, actually income and deductions totaled for 1/1-3/1, 1/1-5/31, 1/1-8/31 and 1/1-12/31.

 

In your case it is probably worth doing.  

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

View solution in original post

1 Reply
jtax
Level 9

underpayment penalty

Congrats. Doing a Roth conversion and paying the tax with non-IRA money is one of the best financial moves you can make.

 

But this is one of the more confusing things about taxes. 

 

What is probably happening is that the default calculation is working off an even income model. So you are required to pay roughly 1/4 of you annual taxes each quarter. In essence, by that method, your April, June, and Sept payments were very late.

You can fix that by going through the Annualized Income
Installment Method described on page 6+ of 

 

https://www.irs.gov/pub/irs-pdf/i2210.pdf

 

[this seems to be the 2018 form instructions, the IRS hasn't updated it, but it will all apply except for the dates]

However that is extremely complicated and confusing. It involves something close to redoing your taxes for each period. Well, actually income and deductions totaled for 1/1-3/1, 1/1-5/31, 1/1-8/31 and 1/1-12/31.

 

In your case it is probably worth doing.  

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

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