Why do I have an underpayment penalty? I used Turbo Tax last year and it told me how much estimated tax to pay.

You were very wise to prepare and pay estimated taxes.  However, they are ESTIMATED taxes.  The amount that you paid is only as good as the estimates you prepared.

 

Here are the rules for underpayment penalties:

 

The underpayment penalty may apply if :

• The amount of tax you paid during the tax year is less than 90% of the tax that you owed for the current year. 
  • Example:  in 2020 you had $8,500 withheld in taxes.  Your 2020 tax return shows that you owe $10,000.  That is less than 90% and there will be a penalty.
• The amount you paid during the tax year didn’t at least equal 100% of your taxes owed the prior year. 
  • Example:  Your 2019 tax return showed that you had $9,000 as a total tax obligation.  You paid $9,001 in withholdings in 2020.  Your 2020 tax bill comes in at $20,000.  There is no penalty because you paid 100% of the 2019 tax.
• The IRS also says you can probably avoid the penalty if the amount you owe is less than $1,000, after subtracting withholdings and refundable credits.

The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest compounds daily.

 

I paid more tax this year. Can't the estimated tax payments be used to prevent the penalty?

@BCTax You may need to pay in estimated taxes to avoid a penalty for late payment of tax. Basically, you need to pay in on a quarterly basis 100% of the tax on last year's tax return or 90% of the tax on this year's tax return. If you don't pay in enough or in a timely fashion, you may get a penalty for late payment of tax.