Roth Conversion

[Bucky771]

I did two Roth conversions in Jan. of 224 and two in March of 224. Turbo tax is showing that I owe penalty for underpayment. I noticed that on my IRA information work sheet that these conversions are showing up on line 35 as " Conversion contributions taxable at conversion" as opposed to line 36 "Conversion contributions not taxable at conversion." I am assuming this is the issue. Why would this be happening and how can I correct it? just a note I haven't paid quarterly taxes for about 4 years since I retired from being self employed. Thanks. 

[dmertz]

Why do you believe that these Roth conversions would be nontaxable?

[Bucky771]

I understand that these conversions will be taxed. But I don't understand why they are coming up as taxable upon conversion as opposed to being able to pay the taxes upon filing. It looks like this is why I am being hit with a penalty.

[dmertz]

"Taxable upon conversion" simply means a conversion that is subject to inclusion in AGI.  It has nothing to do with the timing of the payment of any tax liability.  Similarly, "Nontaxable upon conversion" means a conversion that is not subject to inclusion in AGI because it is a conversion of after-tax basis.

The conversions that you did are income in the first quarter of 2024.  Since you made no estimated tax payments, if your tax withholding for 2024 was not sufficient to meet any of the safe-harbors for an underpayment of taxes, you are subject to an underpayment penalty.  Your tax withholding and income are by default treated as paid evenly throughout the year and underpayment is determined on a quarterly basis.  Depending on how much tax withholding you actually had during each of the tax quarters, you might benefit from annualizing income and tax withholding, but given that you probably received a large portion of your taxable income in Q1, annualizing might actually increase your underpayment penalty.

Make sure that you've told TurboTax your 2023 tax liability so that TurboTax can take into account the safe-harbor that is based on that.  If you used TurboTax for 2023, that information should have transferred into 2024 TurboTax when you began your 2024 tax return.

Regarding underpayment of taxes:  https://www.irs.gov/taxtopics/tc306

[VolvoGirl]

If you get a penalty on 1040 line 38, you might be able to eliminate it or at least reduce it. You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you. It's form 2210.

How to add form 2210 for Underpayment Penalty
https://ttlc.intuit.com/community/tax-payments/help/how-do-i-add-form-2210/00/25703

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

[dmertz]

@VolvoGirl , the bulk of the income appears to have been received in Q1, so it's likely that annualizing would make the penalty greater rather than less.  Only if the bulk of tax withholding also occurred in Q1 and treating it as paid when actually paid would it potentially reduce a Q1 penalty.  It's worth checking, but unlikely to be better than not annualizing.

[Bucky771]

OK. Thanks guys.