Why did TurboTax assess an underpayment penalty?

[AArnott]

Per IRS rules:

You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:

• Your filed tax return shows you owe less than $1,000 or
• You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less.

I had more money withheld for federal income tax in 2021 than my full tax bill in 2020. That should qualify for the last of these conditions (which I bolded). Then why would TurboTax build a non-zero penalty into my federal tax bill (1040 box 38)? Yes, I owed more than $1000 to the IRS in taxes for 2021 (on account of some cap. gains taken from a stock sale), but my reading of the conditions above indicate I shouldn't have been penalized.

[MayaD]

Underpayment penalties are assessed if you don't withhold or pay enough tax on income received during each quarter.

 To reduce or possibly even eliminate your underpayment penalty,  search for annualizing your tax (use this exact phrase) inside TurboTax. This will take you to the underpayment penalty section and we'll take you through the steps to possibly reduce your underpayment penalty. 

[AArnott]

Thanks, but I'm wondering how to reconcile your answer with the IRS' own web site which I quoted in my question. In fact TurboTax's own help says that paying 100% of your tax bill from last year throughout the next one is called a "safe harbor" option. Well, I did that. 100% (and more) of my 2020 tax bill was withheld from my paycheck during 2021. So, both TurboTax and IRS says I should be safe, yet TurboTax applied a penalty anyway. Why?

[Mike9241]

was your 2020 agi over $150K. then 100% becomes 110%. 

it also may be due to the fact that Turbotax has not yet updated the form for 2021 which won't be until 2/24.  so I would wait for the update and then see if the penalty goes away.

by the way "prior year tax liability line 8" per 2210 may not be the same as what you refer to as your tax liability. if you're interested you can read the 2210 instructions for line 8 - prior year tax liability

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

[AArnott]

Yes, my AGI is over $150K. The TurboTax and IRS docs I found didn't mention this AGI limit at all. I see it mentioned in the doc you linked to. Thanks.

Well shoot. I e-filed this morning. Last week TurboTax told me I should wait for an update. Then it updated, and the warning went away, so I thought I had whatever TurboTax thought it would need. Unfortunately I didn't check to see that the penalty went away until after I e-filed. TurboTax's 'step-by-step' view never told me I had a penalty. I had to go to Forms to see it, but then later when I was reviewing the tax return before e-filing I didn't see the penalty there so I thought it had been resolved, and later 'found' it after e-filing. :(

What happens after 2/24 and TurboTax updates again? Will TurboTax possibly realize a change is appropriate and suggest I file an amended return?

[Opus 17]

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@AArnott wrote:

What happens after 2/24 and TurboTax updates again? Will TurboTax possibly realize a change is appropriate and suggest I file an amended return?

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It's unclear what you actually filed.  Did you print or save a copy of your return at the time you filed?  Unfortunately, Turbotax online does not "lock" your file into the as-filed state, although it probably should.

If you did not include a penalty calculation in your actual return, then do nothing for now.  If the IRS sends you a bill for a penalty, you can appeal or request a waiver.

If you did include a penalty calculation and you paid the penalty (or it was subtracted from your refund), then wait until your tax return is processed and any refund is paid.  You may be able at that point, to file an amended return to remove the penalty and claim the penalty amount you paid as an additional refund. 

[AArnott]

I filed with the penalty written into my 1040 box 38. I don't get a refund (I underpaid, after all). So the direct debit for my tax bill will be coming out of my checking account next week. 

I amended a return last year when some banks sent me forms very late that should have been in the original return, so I'm familiar with the process when it's a change I need to make. But when it's a change that TurboTax may need to make based on an updated formula for underpayment, I'm just wondering what to expect.

[JohnW152]

The IRS’ computer program that processes tax returns has a computation for underpayment penalties built into it.

If you owe more or less of a penalty than the IRS’ system computes, you’ll receive a notice and a refund (or bill, as the case may be) reflecting the IRS’ computation.

You should wait to see if this occurs before worrying about an amended return.

[Opus 17]

@AArnott 

Just FYI future, I always recommend declining any penalty that Turbotax calculates.  

1. The program calculation is always off by a few dollars, just because the IRS has a very peculiar way of calculating it, so even if you accept and pay a penalty, you will probably end up getting a bill for a few more dollars or refund of a few dollars.  Just wait for the IRS to bill you and pay what they say.
2. Sometimes Turbotax is wrong and the IRS won't assess a penalty, but if you pay one they might not send it back.
3. If you wait for the IRS to bill you, you can apply for a waiver of the penalty, which you can't do if you just pay it out of hand.