tax underpayment penalty

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Topic Author
viewer0
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tax underpayment penalty

Post by viewer0 »

I know this has been covered before, but still asking.
In 2019 tax year, I had to pay a penalty ( via TurboTax calculation) for not withholding enough in one quarter, although I withheld more than 110% of 2018 taxes paid. At the end I got money back from IRS, but paid a penalty as well.
This year, 2020, In Q3 I got a windfall. Should I pay estimated taxes for Q3 proportionate to the amount (20% LTCG) or can I delay the payment till April 15, 2021.
Assume that I will withhold 110% of taxes that I paid in 2019.
mkc
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Re: tax underpayment penalty

Post by mkc »

You might try running a practice 1040 including Form 2210 (calculation of underpayment penalty) selecting box c (income varied throughout the year) and doing the long-form annualization.

It's a pain in the butt (because the intervals for annualization are NOT the traditional quarters and are cumulative), but it would help give you a better picture of what additional tax you might need to pay.
Lee_WSP
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Re: tax underpayment penalty

Post by Lee_WSP »

Here's the IRS guidelines: https://www.irs.gov/faqs/estimated-tax/ ... utions-etc

What you haven't disclosed is whether your AGI qualifies for the safe harbor (probably; the threshold is very high).

The safe harbor rules are tricky and if there's no reason you can't pay the estimated, you should just pay the estimated.
terran
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Re: tax underpayment penalty

Post by terran »

As long as you meet one of the safe harbors such as withholding 110% of last year's total tax due (for those with an AGI over $150k) then you shouldn't owe a penalty regardless of when you withheld, but this only applies to withholding. Quarterly estimated taxes need to either be paid in 4 equal installments or paid as the income is earned. My suggestion for this year would be to adjust your withholding at your job (if you have one) to hit the 110% safe harbor, and in future years adjust withholding and/or estimated taxes in equal installments to hit that safe harbor. If you don't want to adjust withholding, then yes, you should make a large estimated tax payment for the quarter in which you received the large increase in income.
Topic Author
viewer0
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Re: tax underpayment penalty

Post by viewer0 »

For 2019 tax year, I had to pay a penalty as I took a lumpsum capital gain in Q2, but did not pay estimated tax proportional to the gain. I should have paid 20% of the gain in Q3 for the Q2 gain. I think the requirement to pay estimated tax overrides 110% withholding rule.
RyeBourbon
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Re: tax underpayment penalty

Post by RyeBourbon »

Lee_WSP wrote: Mon Sep 14, 2020 9:33 am Here's the IRS guidelines: https://www.irs.gov/faqs/estimated-tax/ ... utions-etc

What you haven't disclosed is whether your AGI qualifies for the safe harbor (probably; the threshold is very high).

The safe harbor rules are tricky and if there's no reason you can't pay the estimated, you should just pay the estimated.
I believe if AGI < 150k, safe harbor is to withhold 100% of prior year tax, no?
Lee_WSP
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Re: tax underpayment penalty

Post by Lee_WSP »

RyeBourbon wrote: Mon Sep 14, 2020 10:02 am
Lee_WSP wrote: Mon Sep 14, 2020 9:33 am Here's the IRS guidelines: https://www.irs.gov/faqs/estimated-tax/ ... utions-etc

What you haven't disclosed is whether your AGI qualifies for the safe harbor (probably; the threshold is very high).

The safe harbor rules are tricky and if there's no reason you can't pay the estimated, you should just pay the estimated.
I believe if AGI < 150k, safe harbor is to withhold 100% of prior year tax, no?
For a single person, yes I believe that is correct. But the safe harbor doesn't absolve you of all penalties.
terran
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Re: tax underpayment penalty

Post by terran »

viewer0 wrote: Mon Sep 14, 2020 9:51 am For 2019 tax year, I had to pay a penalty as I took a lumpsum capital gain in Q2, but did not pay estimated tax proportional to the gain. I should have paid 20% of the gain in Q3 for the Q2 gain. I think the requirement to pay estimated tax overrides 110% withholding rule.
Correct, estimated taxes need to be paid in a timely manner, not just paid at any time. If you had withheld enough from your Job or IRA withdrawals then it shouldn't matter when the withholding happened.
RyeBourbon wrote: Mon Sep 14, 2020 10:02 am
Lee_WSP wrote: Mon Sep 14, 2020 9:33 am Here's the IRS guidelines: https://www.irs.gov/faqs/estimated-tax/ ... utions-etc

What you haven't disclosed is whether your AGI qualifies for the safe harbor (probably; the threshold is very high).

The safe harbor rules are tricky and if there's no reason you can't pay the estimated, you should just pay the estimated.
I believe if AGI < 150k, safe harbor is to withhold 100% of prior year tax, no?
That matches my understanding. And if AGI > $150k, the safe harbor is to withhold 110% of prior year tax. I could have missed it, but I don't think there are any other income limits related to the safe harbors.
terran
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Re: tax underpayment penalty

Post by terran »

Lee_WSP wrote: Mon Sep 14, 2020 10:07 am
RyeBourbon wrote: Mon Sep 14, 2020 10:02 am
Lee_WSP wrote: Mon Sep 14, 2020 9:33 am Here's the IRS guidelines: https://www.irs.gov/faqs/estimated-tax/ ... utions-etc

What you haven't disclosed is whether your AGI qualifies for the safe harbor (probably; the threshold is very high).

The safe harbor rules are tricky and if there's no reason you can't pay the estimated, you should just pay the estimated.
I believe if AGI < 150k, safe harbor is to withhold 100% of prior year tax, no?
For a single person, yes I believe that is correct. But the safe harbor doesn't absolve you of all penalties.
Yes, it does. That's the only thing the safe harbor does. The issue is that estimated tax payments either need to be paid in 4 equal installments or as the income is earned AND meet a safe harbor. In other words, the safe harbor applies only to underpayment, not to the lack of timely payments. In contrast to estimated payment, withholding is assumed to be timely regardless of when it's withheld.
cas
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Re: tax underpayment penalty

Post by cas »

viewer0 wrote: Mon Sep 14, 2020 9:06 am I know this has been covered before, but still asking.
In 2019 tax year, I had to pay a penalty ( via TurboTax calculation) for not withholding enough in one quarter, although I withheld more than 110% of 2018 taxes paid.
viewer0 wrote: Mon Sep 14, 2020 9:51 am For 2019 tax year, I had to pay a penalty as I took a lumpsum capital gain in Q2, but did not pay estimated tax proportional to the gain. I should have paid 20% of the gain in Q3 for the Q2 gain. I think the requirement to pay estimated tax overrides 110% withholding rule.
Something sounds off here. According to the IRS (Form 2210), "withholding" 110% of the "prior year's tax" should be a safe harbor, no estimated tax required.

But the IRS (Form 2210) is picky about the exact definitions of "withholding" and "prior year's tax". I know I've tripped myself up by thinking I knew the definition of those terms when I didn't. If yours was a situation where Turbotax was not required to attach Form 2210 to your 2019 return, you might find it worthwhile to have google fetch you the 2019 Form 2210 and Form 2210 Instructions and try filling out Part I by hand, using the instructions to make sure you are using the IRS' definition of "withholding" and "prior year's tax." It isn't bad ... just 9 lines, most of which carry over from some specified line from your 2019 or 2018 return. (And if yours was a situation where Turbotax did attach Form 2210 to the 2019 return, then you can look at what Turbotax put in Part I and see if it matches what you thought should have been there.)
Topic Author
viewer0
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Re: tax underpayment penalty

Post by viewer0 »

The issue is that estimated tax payments either need to be paid in 4 equal installments or as the income is earned AND meet a safe harbor. In other words, the safe harbor applies only to underpayment, not to the lack of timely payments. In contrast to estimated payment, withholding is assumed to be timely regardless of when it's withheld.
I think this is the key.
Also I just realized that taxes for any income accrued in September ( hence Q3) need not be paid in October 15. It is Jan 15.

https://www.irs.gov/faqs/estimated-tax/ ... ividuals-2
cas
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Re: tax underpayment penalty

Post by cas »

viewer0 wrote: Mon Sep 14, 2020 10:38 am
Also I just realized that taxes for any income accrued in September ( hence Q3) need not be paid in October 15. It is Jan 15.

https://www.irs.gov/faqs/estimated-tax/ ... ividuals-2
For Form 2210 (and maybe elsewhere), the IRS doesn't define quarters the way the rest of the world defines quarters. September 1 - December 31 are the *4th* quarter according to the Form 2210, so any any income received in September is received in the "4th quarter", hence (if you are planning on filling out Schedule AI of Form 2210) estimated taxes aren't due until the 4th quarter deadline (January 15.)

Plus, the *3rd quarter* deadline for paying estimated tax is September 15, not October 15, because the "3rd quarter" ends on August 31, according to the IRS definition.

Be aware that the "[Estimated] Taxes for any income accrued in September ... not paid in October ... paid in Jan" way of thinking means you are getting yourself into filling out Schedule AI ("Annualized Income") of Form 2210. Schedule AI is somewhere between trivial and impossible, depending on the complexity of your taxes and record-keeping ability. So make sure to at least peek at Schedule AI before you commit yourself to taking the Schedule AI route.
lstone19
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Re: tax underpayment penalty

Post by lstone19 »

cas wrote: Mon Sep 14, 2020 10:17 am
viewer0 wrote: Mon Sep 14, 2020 9:06 am I know this has been covered before, but still asking.
In 2019 tax year, I had to pay a penalty ( via TurboTax calculation) for not withholding enough in one quarter, although I withheld more than 110% of 2018 taxes paid.
viewer0 wrote: Mon Sep 14, 2020 9:51 am For 2019 tax year, I had to pay a penalty as I took a lumpsum capital gain in Q2, but did not pay estimated tax proportional to the gain. I should have paid 20% of the gain in Q3 for the Q2 gain. I think the requirement to pay estimated tax overrides 110% withholding rule.
Something sounds off here. According to the IRS (Form 2210), "withholding" 110% of the "prior year's tax" should be a safe harbor, no estimated tax required.

But the IRS (Form 2210) is picky about the exact definitions of "withholding" and "prior year's tax". I know I've tripped myself up by thinking I knew the definition of those terms when I didn't. If yours was a situation where Turbotax was not required to attach Form 2210 to your 2019 return, you might find it worthwhile to have google fetch you the 2019 Form 2210 and Form 2210 Instructions and try filling out Part I by hand, using the instructions to make sure you are using the IRS' definition of "withholding" and "prior year's tax." It isn't bad ... just 9 lines, most of which carry over from some specified line from your 2019 or 2018 return. (And if yours was a situation where Turbotax did attach Form 2210 to the 2019 return, then you can look at what Turbotax put in Part I and see if it matches what you thought should have been there.)
I agree with cas. If you had 110% of 2018 taxes paid by withholding (not estimated tax payments, but actual withholding), then there should have been no penalty. That's all handled in Part I of Form 2210 (line 6 (withholding) is greater than line 9 (required annual payment)) and it ends right there without ever getting into the penalty calculation part of the form. And as has been said, the requirement to pay estimated tax does NOT override the 110% withholding rule (or any other safe harbor). So there must be something more to this.
MrJedi
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Re: tax underpayment penalty

Post by MrJedi »

This may be basic but I will mention it, ignore if you understand this already. Withholding is something different than paying a quarterly estimated tax. Withholding is done through something like a paycheck or IRA distribution, not a quarterly tax payment.

I wanted to mention because your OP said "not withholding enough in one quarter" and withholding is not tracked quarterly, whereas estimated tax payments are tracked quarterly. You can only get safe harbor through withholding, not estimated tax payments.

Edit: struck out not quite accurate statement as pointed out below.

Main takeaway is you can still have an underpayment penalty if your estimated quarterly taxes are not timely. Withholding is always considered timely and thus not tracked at a quarterly level, even if your withholdings are lopsided toward a quarter.
Last edited by MrJedi on Mon Sep 14, 2020 3:16 pm, edited 1 time in total.
lstone19
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Re: tax underpayment penalty

Post by lstone19 »

MrJedi wrote: Mon Sep 14, 2020 1:34 pm You can only get safe harbor through withholding, not estimated tax payments.
Not true, at least for all practical purposes. While only withholding is considered for the quick test in Part I of From 2210, when you get to the penalty calculation in Part III or Part IV, estimated payments are considered towards seeing if the required quarterly installments (which is derived from the lower of the two safe-harbor amounts) were paid and if you paid the required installment by a total of withholding and/or estimated payments, the penalty will calculate to zero.
Lee_WSP
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Re: tax underpayment penalty

Post by Lee_WSP »

terran wrote: Mon Sep 14, 2020 10:13 am
Lee_WSP wrote: Mon Sep 14, 2020 10:07 am
RyeBourbon wrote: Mon Sep 14, 2020 10:02 am
Lee_WSP wrote: Mon Sep 14, 2020 9:33 am Here's the IRS guidelines: https://www.irs.gov/faqs/estimated-tax/ ... utions-etc

What you haven't disclosed is whether your AGI qualifies for the safe harbor (probably; the threshold is very high).

The safe harbor rules are tricky and if there's no reason you can't pay the estimated, you should just pay the estimated.
I believe if AGI < 150k, safe harbor is to withhold 100% of prior year tax, no?
For a single person, yes I believe that is correct. But the safe harbor doesn't absolve you of all penalties.
Yes, it does. That's the only thing the safe harbor does. The issue is that estimated tax payments either need to be paid in 4 equal installments or as the income is earned AND meet a safe harbor. In other words, the safe harbor applies only to underpayment, not to the lack of timely payments. In contrast to estimated payment, withholding is assumed to be timely regardless of when it's withheld.
That's the part that tricks people up and the rule I am referring to.
lstone19
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Re: tax underpayment penalty

Post by lstone19 »

Lee_WSP wrote: Mon Sep 14, 2020 2:58 pm
terran wrote: Mon Sep 14, 2020 10:13 am
Lee_WSP wrote: Mon Sep 14, 2020 10:07 am For a single person, yes I believe that is correct. But the safe harbor doesn't absolve you of all penalties.
Yes, it does. That's the only thing the safe harbor does. The issue is that estimated tax payments either need to be paid in 4 equal installments or as the income is earned AND meet a safe harbor. In other words, the safe harbor applies only to underpayment, not to the lack of timely payments. In contrast to estimated payment, withholding is assumed to be timely regardless of when it's withheld.
That's the part that tricks people up and the rule I am referring to.
Just take your annual safe-harbor amount (the lower of the two) and divide it by four and that's your quarterly safe-harbor amount. Each quarter, you have to meet it by a combination of withholding and as well as estimated payments in that quarter with any excess from one quarter carrying over to the next.

Due to the carryover, another way to look at it is you must meet 25% of the annual safe-harbor in the 1st quarter, 50% by the end of the two-month 2nd quarter, 75% by the end of 3rd quarter, and 100% by the end of the year.
neverpanic
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Re: tax underpayment penalty

Post by neverpanic »

A workaround many small businesses use is deferring some of their compensation. There's no change to the tax liability, just a change to when the full payment is due (e.g. paying ~nothing in Q1 and paying 2x in Q4). TurboTax is smart software, but does not yet capture all the nuances. Based on what the OP is describing, it seems no penalty is due, although it's possible he could be off by a few dollars.

That said, if you've got the ability to pay the 4 equal installments of estimated tax, it's generally advised to do so. Staying ahead will help avoid potential pitfalls moreso than trying to game a little edge.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
Topic Author
viewer0
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Re: tax underpayment penalty

Post by viewer0 »


Just take your annual safe-harbor amount (the lower of the two) and divide it by four and that's your quarterly safe-harbor amount. Each quarter, you have to meet it by a combination of withholding and as well as estimated payments in that quarter with any excess from one quarter carrying over to the next.
This is quite not correct; I had done that but had an unusual gain in Q2, but did not pay estimated taxes and had to pay penalty even though I paid / withheld more than 110% of previous year's taxes.
So, lesson learnt is whenever any unexpected income lands, you have to pay the estimated taxes per IRS defined quarter rules. In my present case, gains incurred in September 2020 can be paid by Jan 15, 2021, but @cas advises to void filling Form 2210 , it is best to pay by October 2020.
lstone19
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Re: tax underpayment penalty

Post by lstone19 »

viewer0 wrote: Mon Sep 14, 2020 6:49 pm

Just take your annual safe-harbor amount (the lower of the two) and divide it by four and that's your quarterly safe-harbor amount. Each quarter, you have to meet it by a combination of withholding and as well as estimated payments in that quarter with any excess from one quarter carrying over to the next.
This is quite not correct; I had done that but had an unusual gain in Q2, but did not pay estimated taxes and had to pay penalty even though I paid / withheld more than 110% of previous year's taxes.
So, lesson learnt is whenever any unexpected income lands, you have to pay the estimated taxes per IRS defined quarter rules. In my present case, gains incurred in September 2020 can be paid by Jan 15, 2021, but @cas advises to void filling Form 2210 , it is best to pay by October 2020.
Yes, it is correct. We’re trying to get you to clarify exactly why you had a penalty due but you have not provided more information. However, if you indeed paid 110% of the previous year’s tax by withholding (not estimated payments, just withholding), there is no way you should have owed a penalty. If estimated payments were involved, then the timing of them is relevant. As you said “I paid / withheld”, I’m guessing it wasn’t all withholding and as you have provided no information as to the timing of the estimate payments, we’re unable to explain further why you owed a penalty.
Lee_WSP
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Re: tax underpayment penalty

Post by Lee_WSP »

lstone19 wrote: Mon Sep 14, 2020 8:15 pm
viewer0 wrote: Mon Sep 14, 2020 6:49 pm

Just take your annual safe-harbor amount (the lower of the two) and divide it by four and that's your quarterly safe-harbor amount. Each quarter, you have to meet it by a combination of withholding and as well as estimated payments in that quarter with any excess from one quarter carrying over to the next.
This is quite not correct; I had done that but had an unusual gain in Q2, but did not pay estimated taxes and had to pay penalty even though I paid / withheld more than 110% of previous year's taxes.
So, lesson learnt is whenever any unexpected income lands, you have to pay the estimated taxes per IRS defined quarter rules. In my present case, gains incurred in September 2020 can be paid by Jan 15, 2021, but @cas advises to void filling Form 2210 , it is best to pay by October 2020.
Yes, it is correct. We’re trying to get you to clarify exactly why you had a penalty due but you have not provided more information. However, if you indeed paid 110% of the previous year’s tax by withholding (not estimated payments, just withholding), there is no way you should have owed a penalty. If estimated payments were involved, then the timing of them is relevant. As you said “I paid / withheld”, I’m guessing it wasn’t all withholding and as you have provided no information as to the timing of the estimate payments, we’re unable to explain further why you owed a penalty.
It could be the software he used too.
FactualFran
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Re: tax underpayment penalty

Post by FactualFran »

viewer0 wrote: Mon Sep 14, 2020 6:49 pm This is quite not correct; I had done that but had an unusual gain in Q2, but did not pay estimated taxes and had to pay penalty even though I paid / withheld more than 110% of previous year's taxes.
So, lesson learnt is whenever any unexpected income lands, you have to pay the estimated taxes per IRS defined quarter rules. In my present case, gains incurred in September 2020 can be paid by Jan 15, 2021, but @cas advises to void filling Form 2210 , it is best to pay by October 2020.
It is not necessary to make estimated income tax payments as long as enough income tax has been withheld for the year.

Something unusual happened if, as indicated in your opening post, you withheld in 2019 more than 110% of the income tax for 2018 but owed an underpayment penalty for 2019. It would be helpful if you posted the reason why there was an underpayment penalty when there usually should not have been one.

It is a good idea to avoid doing the amount of work needed to complete Schedule AI of Form 2210. However, if quarterly estimated income tax payments were made but not made in a timely manner, then the amount of work may be worth the resulting reduction in the underpayment penalty.
jaj2276
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Re: tax underpayment penalty

Post by jaj2276 »

My understanding is that as long as you meet your safe harbors (90% of this year's tax due, 100/110% of prior year's tax due) using *only* W-2 withholding (trying to be explicit by calling it W-2 withholding instead of just withholding), the timing of the withholding doesn't matter. All W-2 withholding is seen as being paid on Jan 1 of the tax year regardless of when it was actually withheld. A lot of people who have the ability to control withholding will do a big paycheck at the end of the year and withhold their safe harbor amount from that single paycheck.

If you don't meet your safe harbor with only W-2 withholding (even if you meet it with W-2 plus any estimated payments), then the timing of payments needs to coincide with the timing of income. So in the previous example, if the person had made what amounted to a 5% estimated payment in Jan and then paid 88% of tax due using a W-2 withholding in December, the taxpayer might owe a penalty if the income was earned throughout the year and not just in December/Q4 when the bulk of the tax was paid.
lstone19
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Re: tax underpayment penalty

Post by lstone19 »

jaj2276 wrote: Tue Sep 15, 2020 6:34 pm If you don't meet your safe harbor with only W-2 withholding (even if you meet it with W-2 plus any estimated payments), then the timing of payments needs to coincide with the timing of income. So in the previous example, if the person had made what amounted to a 5% estimated payment in Jan and then paid 88% of tax due using a W-2 withholding in December, the taxpayer might owe a penalty if the income was earned throughout the year and not just in December/Q4 when the bulk of the tax was paid.
If by "in January" you mean at the beginning of the tax year (which is implied by you then saying "then paid"), no, this will incur no penalty. Using the 90% safe-harbor, 22.5% needs to be paid by the end of the 1st quarter, a cumulative total of 45.0% by the end of the 2nd, 67.5% by the end of the 3rd, and 90% by year-end. The 88% by withholding divides 22% to each quarter. Adding the 5% paid in the 1st quarter means a total of 27% was paid by the end of the 1st quarter (which is more than the 22.5% required), 49% by the end of the 2nd (greater than 45.0%), 71% by then end of the 3rd, and 93% by year-end. Each quarter meets the cumulative total required by the end of each quarter.
jaj2276
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Re: tax underpayment penalty

Post by jaj2276 »

lstone19 wrote: Tue Sep 15, 2020 6:40 pm
jaj2276 wrote: Tue Sep 15, 2020 6:34 pm If you don't meet your safe harbor with only W-2 withholding (even if you meet it with W-2 plus any estimated payments), then the timing of payments needs to coincide with the timing of income. So in the previous example, if the person had made what amounted to a 5% estimated payment in Jan and then paid 88% of tax due using a W-2 withholding in December, the taxpayer might owe a penalty if the income was earned throughout the year and not just in December/Q4 when the bulk of the tax was paid.
If by "in January" you mean at the beginning of the tax year (which is implied by you then saying "then paid"), no, this will incur no penalty. Using the 90% safe-harbor, 22.5% needs to be paid by the end of the 1st quarter, a cumulative total of 45.0% by the end of the 2nd, 67.5% by the end of the 3rd, and 90% by year-end. The 88% by withholding divides 22% to each quarter. Adding the 5% paid in the 1st quarter means a total of 27% was paid by the end of the 1st quarter (which is more than the 22.5% required), 49% by the end of the 2nd (greater than 45.0%), 71% by then end of the 3rd, and 93% by year-end. Each quarter meets the cumulative total required by the end of each quarter.
Ok, my cherry-picked example was wrong and that's now obvious considering I also said that W-2 withholding was counted as Jan regardless of when it was offered (i.e. I really paid 93% of my tax liability in Q1)! Thanks for the catch. I was trying to imply that the only way to not worry about timing was by meeting safe harbor with W-2 witholding. I should have left it at that.
lstone19
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Re: tax underpayment penalty

Post by lstone19 »

jaj2276 wrote: Wed Sep 16, 2020 12:36 pm Ok, my cherry-picked example was wrong and that's now obvious considering I also said that W-2 withholding was counted as Jan regardless of when it was offered (i.e. I really paid 93% of my tax liability in Q1)! Thanks for the catch. I was trying to imply that the only way to not worry about timing was by meeting safe harbor with W-2 witholding. I should have left it at that.
While doing all by withholding (can be any sort of withholding, not just what appears on a W-2; for example, withholding from an IRA distribution reported on a 1099-R) makes things easier for those trying to calculate, so long as your total of withholding and estimated payments meets the safe-harbor minimum and your estimated payments were equal per quarter or front-loaded (Q1 >= Q2 >= Q3 >= Q4), you will owe no penalty.

Also, people get concerned about 2210 being complicated but the IRS asks that unless you've checked one of the exceptions in Part II, don't file 2210 and rather let the IRS calculate the penalty. The IRS knows when you made the estimated payments so can do the calculations. So even though if you made estimated payments you may need to get into the Part III or Part IV calculations to determine that no penalty is due, you're still not supposed to send 2210 to the IRS. If you use tax software and owe no penalty, it will complete a 2210 in the background, determine that no penalty is due, tell you, and then delete the form. It does the calculations but then complies with the IRS request to not file it (but at least in desktop TT, you can force it to create one so you can see what it's doing).
Alan S.
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Re: tax underpayment penalty

Post by Alan S. »

Note that any calculated penalties for 2020 will be lower since the first and second quarterly estimates were not due until 7/15, so there is no interest due for time periods through 7/15. For the remainder of 2020, the underpayment rate was reduced to 3%.

And with all the disruption that has occurred due to Covid, there is a chance that the IRS will waive more penalties, perhaps levying only in cases of gross underpayment. So I would not pay up front, let the IRS bill you if they choose to.
Topic Author
viewer0
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Re: tax underpayment penalty

Post by viewer0 »

lstone19 wrote: Mon Sep 14, 2020 8:15 pm As you said “I paid / withheld”, I’m guessing it wasn’t all withholding and as you have provided no information as to the timing of the estimate payments, we’re unable to explain further why you owed a penalty.
FactualFran wrote: Tue Sep 15, 2020 6:16 pm It would be helpful if you posted the reason why there was an underpayment penalty when there usually should not have been one.



I sold some stocks in Q2 and had a lumpsum gain. But I did not pay estimated tax ( or withheld proportionately) till October. Hence I was assessed a penalty.
FactualFran
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Re: tax underpayment penalty

Post by FactualFran »

viewer0 wrote: Sun Sep 20, 2020 12:58 pm I sold some stocks in Q2 and had a lumpsum gain. But I did not pay estimated tax ( or withheld proportionately) till October. Hence I was assessed a penalty.
It is still not clear why there was an underpayment penalty.

According to the opening post "In 2019 tax year, I had to pay a penalty ( via TurboTax calculation) for not withholding enough in one quarter, although I withheld more than 110% of 2018 taxes paid." If you withheld more than 110% percent of 2018 taxes paid, then you should not have owned an underpayment penalty.

By default, the total withholding for the year is treated as if it were made at the same rate each quarter. Did you withhold 110% but directed TurboTax to not use the default treatment?

Did you not withhold 110% but the withholding plus estimated tax payments made in October or later added up to more than 110% of 2018 tax paid?
MarkNYC
Posts: 1835
Joined: Mon May 05, 2008 7:58 pm

Re: tax underpayment penalty

Post by MarkNYC »

FactualFran wrote: Sun Sep 20, 2020 5:51 pm
viewer0 wrote: Sun Sep 20, 2020 12:58 pm I sold some stocks in Q2 and had a lumpsum gain. But I did not pay estimated tax ( or withheld proportionately) till October. Hence I was assessed a penalty.
It is still not clear why there was an underpayment penalty.

According to the opening post "In 2019 tax year, I had to pay a penalty ( via TurboTax calculation) for not withholding enough in one quarter, although I withheld more than 110% of 2018 taxes paid." If you withheld more than 110% percent of 2018 taxes paid, then you should not have owned an underpayment penalty.
The OP also stated "At the end I got money back from IRS...", so I will venture a guess as to what happened.

The 2019 tax withholding was less than 90% of 2019 tax so Turbotax calculated an underpayment penalty. The safe harbor based on prior year tax was not used because the 2018 tax amount was not properly entered into the 2019 Turbotax program. Maybe it was the first year using Turbotax, maybe some other reason. The IRS correctly calculated zero underpayment penalty based on prior year tax and returned the penalty amount as part on the money he got back.

For those using a tax program for the first time, it's important to remember to enter the prior year AGI and prior year tax in the appropriate input areas.
tibbitts
Posts: 11938
Joined: Tue Feb 27, 2007 6:50 pm

Re: tax underpayment penalty

Post by tibbitts »

Does anyone know how a refund for the prior year taxes that is applied to the following year count in terms of withholding or quarterly payments for penalty purposes?
kaneohe
Posts: 6697
Joined: Mon Sep 22, 2008 12:38 pm

Re: tax underpayment penalty

Post by kaneohe »

tibbitts wrote: Sun Sep 20, 2020 9:37 pm Does anyone know how a refund for the prior year taxes that is applied to the following year count in terms of withholding or quarterly payments for penalty purposes?
from the F2210 instructions: sounds like you (generally) treat it as a Q1 estimated tax payment.

Line 19
Table 1—List your estimated tax payments for 2019. Before
completing line 19, enter in Table 1 the payments you made for
2019. Include the following payments.
Any overpayment from your 2018 return applied to your 2019
estimated tax payments. Generally, treat the payment as made on
April 15, 2019
tibbitts
Posts: 11938
Joined: Tue Feb 27, 2007 6:50 pm

Re: tax underpayment penalty

Post by tibbitts »

kaneohe wrote: Sun Sep 20, 2020 10:44 pm
tibbitts wrote: Sun Sep 20, 2020 9:37 pm Does anyone know how a refund for the prior year taxes that is applied to the following year count in terms of withholding or quarterly payments for penalty purposes?
from the F2210 instructions: sounds like you (generally) treat it as a Q1 estimated tax payment.

Line 19
Table 1—List your estimated tax payments for 2019. Before
completing line 19, enter in Table 1 the payments you made for
2019. Include the following payments.
Any overpayment from your 2018 return applied to your 2019
estimated tax payments. Generally, treat the payment as made on
April 15, 2019
Thanks, I hadn't found that.
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