Why the under payment penalty

[jimb108]

I don't believe I should have a penalty for 2 reasons:

1. I owed and paid $14,000 in FIT in 2020. I owe $20,890 in 2021. I had $11,586 withheld in 2021 plus I paid $9,340 in estimated taxes for a total of $20,926, yet TT says I owe a underpayment penalty. 

IRS says: "To avoid an underpayment penalty, individuals must pay either 100% of last year's tax or 90% of this year's tax".  I have done both.  If timing is an issue, see item #2.

So, why the penalty and how do I correct it in TT?

2.  I did a $50,000 Roth conversion on 12/15/21 and paid the tax on it on 12/22/21. Otherwise our income and withholding was steady throughout the year. If I paid the tax on the conversion in the same month and the conversion, why am I getting a penalty?

Please advise,  Thanks!

[LenaH]

It depends. 

Generally, you'll have to pay an underpayment penalty if you owe more than $1,000 in taxes (after taking withholding into account) and:

 * Your taxes withheld don't cover at least 90% of your 2021 tax liability, or

 * Your taxes withheld aren't at least 100% of your 2020 tax liability if your AGI is up to $150,000 or 110% if your AGI is more than $150,000. (The amount is $75,000 if you're married filing separately.)

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. TurboTax will take you through the steps to possibly reduce your underpayment penalty. On these screens, you can also elect to remove the penalty and have the IRS bill you directly. 

[Mike9241]

were your estimated tax payments timely.  perhaps you entered a bad date which would make them late and subject you to penalties

review form 2210

[jimb108]

I checked the date and as I stated i paid the tax within 1 week of my Roth conversion in December 2021

[jimb108]

My taxes actually withheld from our paychecks as shown on the W-2s, do not meet those standards you described but with my estimated tax payments they far exceed those (90% of 2021 or 110% of 2020).

Are you saying the penalty calculation does not include the Estimated tax payments even if they was made in the same week as the Roth conversion?

[BillM223]

"If I paid the tax on the conversion in the same month and the conversion"

You need to rethink this. When you receive a 1099-R (as I assume you did for your IRS to Roth conversion), withholding money at this time is not the same as paying your tax on the conversion.

Instead, tax due and paid is on an annual basis (I'll get to annualization on the 2210 later). That is, all your taxes due are lumped together and all your withholding and estimated taxes are lumped together. You can't pay tax on the conversion separately.

I suspect that the reason that you have a penalty is because the default stance is to take your total income and divide by 4 quarters (more or less) and compare that the amount you withheld and paid otherwise each quarter.

As you realize, your income for the year was not at all linear like this calculation on income quarter by quarter would be, so TurboTax would think that you should have paid a lot more in the first 3 quarters until you caught up in the 4th quarter.

But the IRS allows you to "annualize your income" on form 2210, where you tell TurboTax how much you made per quarter, and compare that to how much you withheld/paid. Even if you do not completely escape any penalty, in your situation, you have a good chance of sharply reducing it.

So as Lena said above, please do a Search (upper right) for annualizing your tax (enter this exact phrase and ignore any suggested search terms, just hit Enter). This will give you a jump-to link, which will take you to the 2210 section on figuring your penalty and any exceptions. NOTE: if you are a Mac user, there is no Search - you will have to look up this phrase in the Topics List.

Once you are in this interview, you will answer the questions as asked. A number of screens in, you will see a screen with the heading of Annualized Income Method. At the bottom you are asked "Do you want to annualize your income?" Answer YES.

In two more screens, you will be asked to enter the accumulating amount of income you had each quarter. That is, the first box is for income from 1/1/2021 through 3/31/2021, the second box is for all income from 1/1/2021 through 5/31/2021, and so on.

In this way, TurboTax will know that the bulk of your income was in the 4th quarter and can populate the 2210AI (part of the 2210). If it turns out that you withheld/paid the appropriate amount of tax for each quarter, then you will likely find that your penalty is reduced/eliminated.

But you won't know until you go through the process.