Underpayment Penalty

[skives]

I may have underpaid my federal and Michigan state taxes for 2021. I didn’t realize I needed to make quarterly estimated payments if I knew I would owe at the end of the year. The last quarterly estimated payment is due January 15, 2022. Is there anything I can do by then to avoid paying a penalty on my underpayment?



I read the penalty is waived if I paid 100% of last years taxes. Does that mean if I paid my tax liability of last year in this years taxes. If so I paid 300 less this year (2021) in federal tax than last year (2020).

[kork13]

There are a few exceptions for underpayment penalties -- per the IRS Form 2210 Instructions (I adjusted the quote for the 2021 tax year):
"In general, you may owe the penalty for 2021 if the total of your withholding and timely estimated tax payments didn't equal at least the smaller of:
1. 90% of your 2021 tax, or
2. 100% of your 2020 tax. Your 2020 tax return must cover a 12-month period."

There are more specific exemptions in place, but the above covers the most common scenarios.

Honestly, if you're worried about it, I'd suggest reading the above referenced IRS form & instructions for details about how to avoid or address the issue -- they're not terribly long, and available here. But in general terms, if you do owe it, best to pay the shortage, penalty, and interest immediately, because the timeline matters.

[MonkeyMama]

Two things. If income is above $150K (MFJ), you need to pay 110% prior year tax for the safe harbor. Just FYI, don't know if that applies.

The way around it is to pay withheld taxes (e.g. from salary) versus paying in estimates. Withheld taxes count as evenly contributed throughout the year. I personally just take out extra taxes end of year if I want to pay in more taxes (from my salary). Then I just don't have to deal with estimated taxes and all that (and don't get penalized for not being psychic and not knowing earlier in the year what might taxes might be). It's probably too late for you to make these kind of changes, but FYI for the future.

[Like2Plan]

In addition to the safe harbors listed above and adjusting withholding, if you are over 59.5 and retired you could take a distribution from your tIRA and withhold taxes from that. As MonkeyMama mentioned above, it is too late to make any of these adjustments at this time. ( I tried to do the withholding taxes from an tIRA distribution on the 31st of Dec of last year as an experiment. However, it was too late for it to be applied to 2020 and it was applied to 2021. ) In my case we are taking distributions for living expenses from our IRA's anyway-so it was part of the plan. If it wasn't part of your distribution plan, you could put the money back in to the IRA from your taxable money within 60 days, but it would count as your one indirect IRA rollover for the year. (https://www.irs.gov/retirement-plans...-distributions)

The estimated taxes are problematic in that IRS is expects 4 equal payments or there could be a penalty. If you have "lumpy income" --where you might receive the income in the 4th quarter you can file an annualized tax form ( https://www.investopedia.com/terms/a...ent-method.asp )

Have you run it through tax software to see how much of a penalty you are going to incur?

[skives]

[QUOTE=


Have you run it through tax software to see how much of a penalty you are going to incur?[/QUOTE]

I have run my taxes through turbo tax. Looks like I may owe $2,569 to feds and $706 to state. I just made a tax payment to each but that’s the only payment I have made. I was unaware I needed to pay estimated taxes. This is all from sports betting online. I knew I would owe when filling but thought I could pay what was owed when I file taxes this year. I didn’t know there was a penalty. I guess I’ll just have to wait and see what the penalty is.

I think the state penalty is going to be about $200. Not sure of the federal penalty.

[Like2Plan]

I have run my taxes through turbo tax. Looks like I may owe $2,569 to feds and $706 to state. I just made a tax payment to each but that’s the only payment I have made. I was unaware I needed to pay estimated taxes. This is all from sports betting online. I knew I would owe when filling but thought I could pay what was owed when I file taxes this year. I didn’t know there was a penalty. I guess I’ll just have to wait and see what the penalty is.

I think the state penalty is going to be about $200. Not sure of the federal penalty.

If you met one of the safe harbors, that would have worked for federal. (As you noted, the state taxes are different and might even be more strict. )

Here are some links from Turbotax FAQs topics on penalty calculations:

Does Turbotax calculate a quarterly estimated tax penalty?

https://ttlc.intuit.com/community/taxes/discussion/does-turbotax-calculate-a-quarterly-estimated-tax-penalty/00/412273

Guide to IRS Tax Penalties: How to Avoid or Reduce Them

https://turbotax.intuit.com/tax-tips/irs-letters-and-notices/guide-to-irs-tax-penalties-how-to-avoid-or-reduce-them/L7Unetw5B

If you don't meet the safe harbor, you might be able to get some leniency. Here is a quote from the above link:
"How to get tax penalties removed
In a perfect world, you'd never have to deal with IRS penalties. Unfortunately, tax penalties are a reality for many people. Fortunately, the IRS is often willing to work with people who make mistakes. This process is known as penalty abatement.
There are two common reasons the IRS might consider penalty abatement.
1. Reasonable cause
If you didn't file on time or pay the tax you owe due to extenuating circumstances, the IRS might agree to waive your penalties. Examples of reasonable cause might include a house fire, natural disaster, illness, or an immediate family member's death.
2. First-time penalty abatement
If you're normally on top of your tax filing responsibilities but just missed the filing deadline or payment due date, the IRS may do you a one-time favor. To qualify, you must have filed all of your tax returns, pay your outstanding balance or set up an installment agreement with the IRS, and have no prior penalties in the past three years.
Remember, with TurboTax, we'll ask you simple questions about your life and help you fill out all the right tax forms. With TurboTax you can be confident your taxes are done right, from simple to complex tax returns, no matter what your situation."


Estimated Taxes: Common Questions

https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-common-questions/L1luHqVdl

What is Form 2210?

https://turbotax.intuit.com/tax-tips/irs-tax-forms/what-is-form-2210/L2z0haVWb

How and When to Pay Penalty on Missing Estimated Taxes

https://ttlc.intuit.com/community/taxes/discussion/how-and-when-to-pay-penalty-on-missing-estimated-taxes/00/1747526

[ryan_themoneyguy]

Do you have a CPA you can talk to? If so, do that right away. If you have a tax bill due, it's best to pay it as quickly as possible to avoid additional penalties.

[kork13]

(Resurrecting this thread rather than starting a new one)

I'm not overly concerned about the possibility, but I've never been clear on it.... When it comes to the underpayment safe harbor, how is it actually calculated? Is it based on your "Total Tax" (line 24)? Your "Amount you owe" (Line 37)? Or something else entirely? Does "pay 100% of last year's tax" include only your paid tax withholding (lines 25a-d)? Or does that "pay 100%" amount also include the value of this year's tax credits (line 32), even though you don't actually pay them directly yourself?

As an example with numbers, my "total tax" from 2021 was $13,671 .... That year, I paid $8,019 in withholdings, but with all of the tax credits & such ($15,450 that year, thanks to 3 kids), we ended up with a $9,798 refund. That said, I know that 2021 was a weird tax year, with the "COVID recovery credits" ... So I know that our refund (if any) will be much lower this year .... though I have no idea how we'll end up, and haven't done any estimates for this year yet.

I just haven't found a clear explanation of what dollar figure I would actually have to pay in order to ensure we wouldn't be subject to any underpayment penalties. Again, not actually concerned that we will have a significant underpayment... but I'm curious to understand what that minimum should be.

Most particularly, in 2024 I'll stop receiving a contracted annual bonus, the automatic withholding from which ($4,400) has made up the majority of our annual withholdings for the last handful of years. So when that bonus ends, I'll have to be more careful to ensure that I'm withholding enough, and get my W4 recalculated... This circumstance is the primary impetus of my question.

[MonkeyMama]

(Resurrecting this thread rather than starting a new one)

I'm not overly concerned about the possibility, but I've never been clear on it.... When it comes to the underpayment safe harbor, how is it actually calculated? Is it based on your "Total Tax" (line 24)? Your "Amount you owe" (Line 37)? Or something else entirely?

It's referring to Line 24 (Total Tax), minus any tax credits (Lines 28 & 29).

[kork13]

It's referring to Line 24 (Total Tax), minus any tax credits (Lines 28 & 29).

Interesting... So you really kinda have to know in advance what your tax credits will be for the current year, before you can be certain of what you need to pay in to ensure you avoid any underpayment penalties.

Does that also mean that in the case of someone with tax credits that actually exceed total tax (such as our 2021 figures) ... it's impossible to have an underpayment penalty in the following year? (because total tax - credits = less than $0)

[MonkeyMama]

It's referring to Line 24 (Total Tax), minus any tax credits (Lines 28 & 29).

P.S. They've really changed around the 1040 form since I did taxes professionally. I always personally took the net tax (net of credits). But it just occurred to me to check Form 2210 instructions (re: more confusing current 1040). Look at the instructions for line 8, Form 2210. That's the more complicated answer. Is inclusive of other taxes and other tax credits (other than the line items I mentioned).

[MonkeyMama]

Interesting... So you really kinda have to know in advance what your tax credits will be for the current year, before you can be certain of what you need to pay in to ensure you avoid any underpayment penalties.

Does that also mean that in the case of someone with tax credits that actually exceed total tax (such as our 2021 figures) ... it's impossible to have an underpayment penalty in the following year? (because total tax - credits = less than $0)

You don't need to know what your current year tax or credits will be. The safe harbor is based on your prior year's tax return.

You are correct about the $0. No underpayment penalty if the prior year safe harbor is $0.