Penalty for under payment of taxes for recently cashed in EE bond

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CharlesNorris
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Penalty for under payment of taxes for recently cashed in EE bond

Post by CharlesNorris »

For Christmas, my wife and I received a pleasant surprise from her parents in the form of a matured 30 year EE savings bond. My wife was listed as the co-owner and we subsequently cashed it in Dec 27th. The amount of interest is a little over $15,000 which we’ll have to pay taxes on (22% marginal fed tax rate so approximately $3300). Will my wife and I have to pay a penalty for underpayment of taxes? If so, how can we avoid this?
MrJedi
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by MrJedi »

If you withheld enough in 2021 to meet a safe harbor, nothing needs to be done to avoid penalty and you can just square up on your tax return.

Otherwise you have until January 18 to send a quarterly estimated tax payment.
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CharlesNorris
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by CharlesNorris »

MrJedi wrote: Thu Jan 13, 2022 6:45 am If you withheld enough in 2021 to meet a safe harbor, nothing needs to be done to avoid penalty and you can just square up on your tax return.

Otherwise you have until January 18 to send a quarterly estimated tax payment.
How much is enough to meet a safe harbor. A rough estimate shows that I owed $17,000 in federal
Income tax and after credits and fed income tax already paid, I’ll owe approximately $3600 because of this money. Would that be considered safe harbor ?
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samsoes
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by samsoes »

MrJedi wrote: Thu Jan 13, 2022 6:45 am If you withheld enough in 2021 to meet a safe harbor, nothing needs to be done to avoid penalty and you can just square up on your tax return.

Otherwise you have until January 18 to send a quarterly estimated tax payment.
In such a case, the OP will have to use the dreaded Auunal Income Installment part of form 2210 which is not for the faint of heart. (Essentially, you prepare your tax return four times, each from Jan 1 to the end of the IRS quarter, separating wages and deductions earned in each period only.) This is necessary to show that the extra income was incurred late in the year and establishes the payment due per period, not the annual payment due divided evenly.

In any event, the penalty interest is only 5% of the shortage, accruing on a day to day basis per quarter, so we're not talking about big bucks.
Last edited by samsoes on Thu Jan 13, 2022 7:01 am, edited 1 time in total.
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MrJedi
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by MrJedi »

90% or 100% of this year's tax (depends on last year AGI and filing status)

Or

100% or 110% of last year's tax (depends on last year AGI and filing status)
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by samsoes »

CharlesNorris wrote: Thu Jan 13, 2022 6:51 am
MrJedi wrote: Thu Jan 13, 2022 6:45 am If you withheld enough in 2021 to meet a safe harbor, nothing needs to be done to avoid penalty and you can just square up on your tax return.

Otherwise you have until January 18 to send a quarterly estimated tax payment.
How much is enough to meet a safe harbor. A rough estimate shows that I owed $17,000 in federal
Income tax and after credits and fed income tax already paid, I’ll owe approximately $3600 because of this money. Would that be considered safe harbor ?
Safe harbor is the total tax* from last year, or 90% of the tax due this year.

*Either 100% or 110% of the total tax from last year, depending on your income.
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CharlesNorris
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by CharlesNorris »

samsoes wrote: Thu Jan 13, 2022 6:59 am
CharlesNorris wrote: Thu Jan 13, 2022 6:51 am
MrJedi wrote: Thu Jan 13, 2022 6:45 am If you withheld enough in 2021 to meet a safe harbor, nothing needs to be done to avoid penalty and you can just square up on your tax return.

Otherwise you have until January 18 to send a quarterly estimated tax payment.
How much is enough to meet a safe harbor. A rough estimate shows that I owed $17,000 in federal
Income tax and after credits and fed income tax already paid, I’ll owe approximately $3600 because of this money. Would that be considered safe harbor ?
Safe harbor is the total tax* from last year, or 90% of the tax due this year.

*Either 100% or 110% of the total tax from last year, depending on your income.
Thanks for the info. So my taxable income this year is approximately 11,000 more this year and my total tax is approximately $2400 more this year. Since I’ve paid more this year than last year, does that mean I hit 100% of the total tax from last year? Or since I underpaid by $3600 I’m still $1200 short of the amount that I paid for last year and safe harbor doesn’t apply to me.

Also, is there just an easy way to digitally pay tax money owed without filling out all the paperwork?
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by MrJedi »

It depends on your last year AGI and filing status. It can be either 100% or 110% of last year's tax based on those things.

If you meet that, you are good without further action, you will just have the normal tax due on your return. The rule is setup so you aren't surprised by a penalty due to a one time lumpy income you don't regularly have, precisely the situation you are in.
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CharlesNorris
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by CharlesNorris »

MrJedi wrote: Thu Jan 13, 2022 7:39 am It depends on your last year AGI and filing status. It can be either 100% or 110% of last year's tax based on those things.

If you meet that, you are good without further action, you will just have the normal tax due on your return. The rule is setup so you aren't surprised by a penalty due to a one time lumpy income you don't regularly have, precisely the situation you are in.
Thanks for the reply. Last year AGI was 11,000 less than this year and we filed married jointly….. So the worse case scenario if I didn’t meet last years safe harbor is 5% of $3600 =$180 penalty.
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by MrJedi »

This is the information you need.

2020 filing status (specifically were you married filing separate or not)
2020 AGI (2020 1040 line 11)
2020 total tax (2020 1040 line 22)
2021 taxes withheld for the year (will be on your W2 and any other withholding sources for the year. You should also see this on final 2021 paystub)

Edit: saw you were MFJ. So the 2020 AGI threshold you care about is 150k. Below 150k then you need 100% last year tax. Above 150k you need 110% of last year tax.
Last edited by MrJedi on Thu Jan 13, 2022 8:06 am, edited 1 time in total.
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CharlesNorris
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by CharlesNorris »

MrJedi wrote: Thu Jan 13, 2022 7:47 am This is the information you need.

2020 filing status (specifically were you married filing separate or not)
2020 AGI (2020 1040 line 11)
2020 total tax (2020 1040 line 24)
2021 taxes withheld for the year (will be on your W2 and any other withholding sources for the year. You should also see this on final 2021 paystub)
Thanks for all your help

Married filing jointly
$129,829 agi 2020
$10,840 tot tax 2020
$10,008 tax paid this year 2021

So it looks like I’m not 100% of last year and didn’t meet safe harbor
Last edited by CharlesNorris on Thu Jan 13, 2022 8:00 am, edited 1 time in total.
cas
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by cas »

CharlesNorris wrote: Thu Jan 13, 2022 7:31 am Also, is there just an easy way to digitally pay tax money owed without filling out all the paperwork?
Yes, there are digital options. See the section on "How To Pay Estimated Tax" on page 3 of Form 1040-ES.
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CharlesNorris
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by CharlesNorris »

cas wrote: Thu Jan 13, 2022 7:59 am
CharlesNorris wrote: Thu Jan 13, 2022 7:31 am Also, is there just an easy way to digitally pay tax money owed without filling out all the paperwork?
Yes, there are digital options. See the section on "How To Pay Estimated Tax" on page 3 of Form 1040-ES.
Thanks for the link
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by MrJedi »

Yes looks like you are not quite safe harbor.

You can do the estimated tax and fill the complex form due to Q4 tax.

If you take the penalty, keep in mind it's an annualized 3% on the shortfall. So it wouldn't be a full 3% since you would be less than a year late.

Edit: corrected penalty interest rate
Last edited by MrJedi on Thu Jan 13, 2022 1:01 pm, edited 1 time in total.
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CharlesNorris
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by CharlesNorris »

MrJedi wrote: Thu Jan 13, 2022 8:09 am Yes looks like you are not quite safe harbor.

You can do the estimated tax and fill the complex form due to Q4 tax.

If you take the penalty, keep in mind it's an annualized 5% on the shortfall. So it wouldn't be a full 5% since you would be less than a year late.
Thanks for all your help. My plan going forward seems to complete taxes sooner than later to avoid the full 5%. It looks as though if taxes are paid, completed, and postmarked by Jan 31, I can avoid all fines. Thanks again
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by lstone19 »

CharlesNorris wrote: Thu Jan 13, 2022 8:18 am Thanks for all your help. My plan going forward seems to complete taxes sooner than later to avoid the full 5%. It looks as though if taxes are paid, completed, and postmarked by Jan 31, I can avoid all fines. Thanks again
The underpayment penalty is 3%, not 5% currently and it is an annual rate as it is essentially interest.

Using the numbers you posted above, you're about $800 short of the safe harbor for the year which is also the minimum you are required to pay ahead of 4/15. But that divides by quarters. So you were $200 short each quarter. If you pay the $800 today, you'd have:
Q1: $200 due 4/15/21, paid ~1/15/22, 9 months late so penalty is $300 * 3% * 9/12 of a year = $6.75
Q2: $200 due 6/15/21, paid ~1/15/22, 7 months late so penalty is $300 * 3% * 7/12 of a year = $3.94
Q3: $200 due 9/15/21, paid ~1/15/22, 4 months late so penalty is $300 * 3% * 9/12 of a year = $3.00
Q4: $200 due 1/15/22, paid ~1/15/22, not late, no penalty

Total penalty: ~$14

So send the $832 you're short today (either with a 1040-ES voucher or via the online payment options), then take your time with your tax return, and unless you really think $14 is worth hours of your time, send your tax return without a 2210 (the IRS instructs you not to file it unless you've selected one of the reasons such as the difficult annualized income method), and eventually, the IRS might bill you for the penalty.
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by CharlesNorris »

lstone19 wrote: Thu Jan 13, 2022 10:07 am
CharlesNorris wrote: Thu Jan 13, 2022 8:18 am Thanks for all your help. My plan going forward seems to complete taxes sooner than later to avoid the full 5%. It looks as though if taxes are paid, completed, and postmarked by Jan 31, I can avoid all fines. Thanks again
The underpayment penalty is 3%, not 5% currently and it is an annual rate as it is essentially interest.

Using the numbers you posted above, you're about $800 short of the safe harbor for the year which is also the minimum you are required to pay ahead of 4/15. But that divides by quarters. So you were $200 short each quarter. If you pay the $800 today, you'd have:
Q1: $200 due 4/15/21, paid ~1/15/22, 9 months late so penalty is $300 * 3% * 9/12 of a year = $6.75
Q2: $200 due 6/15/21, paid ~1/15/22, 7 months late so penalty is $300 * 3% * 7/12 of a year = $3.94
Q3: $200 due 9/15/21, paid ~1/15/22, 4 months late so penalty is $300 * 3% * 9/12 of a year = $3.00
Q4: $200 due 1/15/22, paid ~1/15/22, not late, no penalty

Total penalty: ~$14

So send the $832 you're short today (either with a 1040-ES voucher or via the online payment options), then take your time with your tax return, and unless you really think $14 is worth hours of your time, send your tax return without a 2210 (the IRS instructs you not to file it unless you've selected one of the reasons such as the difficult annualized income method), and eventually, the IRS might bill you for the penalty.
Wow that’s super informative. Thanks for breaking it down like that. $14 is not worth hours of my time. I appreciate the guidance.
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by lstone19 »

CharlesNorris wrote: Thu Jan 13, 2022 10:55 am Wow that’s super informative. Thanks for breaking it down like that. $14 is not worth hours of my time. I appreciate the guidance.
You're welcome.
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by Gill »

CharlesNorris wrote: Thu Jan 13, 2022 6:25 am ...in the form of a matured 30 year EE savings bond.
Curious if this bond reached maturity in 2021?
Gill
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CharlesNorris
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by CharlesNorris »

Gill wrote: Thu Jan 13, 2022 12:09 pm
CharlesNorris wrote: Thu Jan 13, 2022 6:25 am ...in the form of a matured 30 year EE savings bond.
Curious if this bond reached maturity in 2021?
Gill
Interest ceases June 2022 - but for tax purposes (with other issues) and what this money was earmarked for it was better to claim in 2021 then 2022
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by lstone19 »

CharlesNorris wrote: Thu Jan 13, 2022 1:09 pm
Gill wrote: Thu Jan 13, 2022 12:09 pm
CharlesNorris wrote: Thu Jan 13, 2022 6:25 am ...in the form of a matured 30 year EE savings bond.
Curious if this bond reached maturity in 2021?
Gill
Interest ceases June 2022 - but for tax purposes (with other issues) and what this money was earmarked for it was better to claim in 2021 then 2022
It isn't that simple. Savings Bond interest is generally taxable in the year it is redeemed. If you did not redeem it in 2021, then it is normally not taxable in 2021. But, there is the option to pay taxes on the interstate's as you go but I am not sure how that works when you receive the bond as a gift.

For that matter, how was it gifted? Was it a paper bond? Or was it held at Treasury Direct? And was it re-registered to you in 2021?
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CharlesNorris
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by CharlesNorris »

Thanks for the info. I know that it is taxable in the year it is redeemed and I appreciate you clarifying that. I have other bonds ($) coming due next year and I didn’t want to bring my AGI over a certain threshold so I cashed the paper bonds for this tax year (2021).
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by lstone19 »

CharlesNorris wrote: Thu Jan 13, 2022 2:00 pm Thanks for the info. I know that it is taxable in the year it is redeemed and I appreciate you clarifying that. I have other bonds ($) coming due next year and I didn’t want to bring my AGI over a certain threshold so I cashed the paper bonds for this tax year (2021).
OK. So final maturity having been in 2022 is irrelevant other than to tell us that it had not reached final maturity in an earlier year (which would create a different tax issue). So as I said earlier and you previously acknowledged, just send a payment now that gets you over 100% of last year’s tax and stops the clock on penalties, file when you can, and expect a bill from the IRS for a small penalty which they may not even bother sending.
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by CharlesNorris »

lstone19 wrote: Thu Jan 13, 2022 3:40 pm
CharlesNorris wrote: Thu Jan 13, 2022 2:00 pm Thanks for the info. I know that it is taxable in the year it is redeemed and I appreciate you clarifying that. I have other bonds ($) coming due next year and I didn’t want to bring my AGI over a certain threshold so I cashed the paper bonds for this tax year (2021).
OK. So final maturity having been in 2022 is irrelevant other than to tell us that it had not reached final maturity in an earlier year (which would create a different tax issue). So as I said earlier and you previously acknowledged, just send a payment now that gets you over 100% of last year’s tax and stops the clock on penalties, file when you can, and expect a bill from the IRS for a small penalty which they may not even bother sending.
Thanks
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by RetiredAL »

lstone19 wrote: Thu Jan 13, 2022 10:07 am
CharlesNorris wrote: Thu Jan 13, 2022 8:18 am Thanks for all your help. My plan going forward seems to complete taxes sooner than later to avoid the full 5%. It looks as though if taxes are paid, completed, and postmarked by Jan 31, I can avoid all fines. Thanks again
The underpayment penalty is 3%, not 5% currently and it is an annual rate as it is essentially interest.

Using the numbers you posted above, you're about $800 short of the safe harbor for the year which is also the minimum you are required to pay ahead of 4/15. But that divides by quarters. So you were $200 short each quarter. If you pay the $800 today, you'd have:
Q1: $200 due 4/15/21, paid ~1/15/22, 9 months late so penalty is $300 * 3% * 9/12 of a year = $6.75
Q2: $200 due 6/15/21, paid ~1/15/22, 7 months late so penalty is $300 * 3% * 7/12 of a year = $3.94
Q3: $200 due 9/15/21, paid ~1/15/22, 4 months late so penalty is $300 * 3% * 9/12 of a year = $3.00
Q4: $200 due 1/15/22, paid ~1/15/22, not late, no penalty

Total penalty: ~$14

So send the $832 you're short today (either with a 1040-ES voucher or via the online payment options), then take your time with your tax return, and unless you really think $14 is worth hours of your time, send your tax return without a 2210 (the IRS instructs you not to file it unless you've selected one of the reasons such as the difficult annualized income method), and eventually, the IRS might bill you for the penalty.
+1 to lstone for breaking the myth that this penalty is something to dread!
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by DavidC »

CharlesNorris wrote: Thu Jan 13, 2022 6:25 amFor Christmas, my wife and I received a pleasant surprise from her parents in the form of a matured 30 year EE savings bond. My wife was listed as the co-owner and we subsequently cashed it in Dec 27th.
We need to confirm that your wife in fact owes the tax on the bonds. Is the other co-owner still alive, and if so did the other co-owner purchase the bond (almost 30 years ago) with their own money? If the answer to both questions is 'yes' then the other co-owner is the one that owes the tax even though your wife is the one that cashed the bond (and will receive the 1099-INT form). Reference: IRS Publication 550 ("Co-owners" > "One co-owner's funds used")

(If the answer to both questions above was 'yes' then its also possible Gift Tax against the other co-owner is also involved here although I'm not certain about that/not very familiar with Gift Taxation)
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by FreddieFIRE »

samsoes wrote: Thu Jan 13, 2022 6:56 am In any event, the penalty interest is only 5% of the shortage, accruing on a day to day basis per quarter, so we're not talking about big bucks.
Are you sure it's not 3%?
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by samsoes »

PVolker wrote: Sun Jan 16, 2022 7:06 pm
samsoes wrote: Thu Jan 13, 2022 6:56 am In any event, the penalty interest is only 5% of the shortage, accruing on a day to day basis per quarter, so we're not talking about big bucks.
Are you sure it's not 3%?
Strange, on the online instructions for form 2210, https://www.irs.gov/instructions/i2210, the worksheet (part IV, section B) has the rate 5% for the first quarterly period, and 3% for each subsequent quarterly period. Doesn't seem right...
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by lstone19 »

samsoes wrote: Sun Jan 16, 2022 7:21 pm
PVolker wrote: Sun Jan 16, 2022 7:06 pm
samsoes wrote: Thu Jan 13, 2022 6:56 am In any event, the penalty interest is only 5% of the shortage, accruing on a day to day basis per quarter, so we're not talking about big bucks.
Are you sure it's not 3%?
Strange, on the online instructions for form 2210, https://www.irs.gov/instructions/i2210, the worksheet (part IV, section B) has the rate 5% for the first quarterly period, and 3% for each subsequent quarterly period. Doesn't seem right...
First, those are the 2020 instructions. What doesn't seem right? The rate was reduced during the year and AFAIK, is still 3%.
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by samsoes »

lstone19 wrote: Sun Jan 16, 2022 7:26 pm
samsoes wrote: Sun Jan 16, 2022 7:21 pm
PVolker wrote: Sun Jan 16, 2022 7:06 pm
samsoes wrote: Thu Jan 13, 2022 6:56 am In any event, the penalty interest is only 5% of the shortage, accruing on a day to day basis per quarter, so we're not talking about big bucks.
Are you sure it's not 3%?
Strange, on the online instructions for form 2210, https://www.irs.gov/instructions/i2210, the worksheet (part IV, section B) has the rate 5% for the first quarterly period, and 3% for each subsequent quarterly period. Doesn't seem right...
First, those are the 2020 instructions. What doesn't seem right? The rate was reduced during the year and AFAIK, is still 3%.
What doesn't seem right are the differing penalty interest rates from one quarterly period to the next. In all my years dealing with form 2210, the rate has never been variable.
lstone19 wrote: Sun Jan 16, 2022 7:26 pm First, those are the 2020 instructions. What doesn't seem right? The rate was reduced during the year and AFAIK, is still 3%.
Second?
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by lstone19 »

samsoes wrote: Sun Jan 16, 2022 7:40 pm
lstone19 wrote: Sun Jan 16, 2022 7:26 pm First, those are the 2020 instructions. What doesn't seem right? The rate was reduced during the year and AFAIK, is still 3%.
What doesn't seem right are the differing penalty interest rates from one quarterly period to the next. In all my years dealing with form 2210, the rate has never been variable.
So, they decided to do it differently. I could just as easily said just a few years ago, “In all my years dealing with Schedule A, state and local taxes have never been limited.”
lstone19 wrote: Sun Jan 16, 2022 7:26 pm First, those are the 2020 instructions. What doesn't seem right? The rate was reduced during the year and AFAIK, is still 3%.
Second?
Good point. Let’s try “Second, what doesn’t seem right?”
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Re: Penalty for under payment of taxes for recently cashed in EE bond

Post by MarkNYC »

samsoes wrote: Sun Jan 16, 2022 7:40 pm
lstone19 wrote: Sun Jan 16, 2022 7:26 pm
samsoes wrote: Sun Jan 16, 2022 7:21 pm
PVolker wrote: Sun Jan 16, 2022 7:06 pm
samsoes wrote: Thu Jan 13, 2022 6:56 am In any event, the penalty interest is only 5% of the shortage, accruing on a day to day basis per quarter, so we're not talking about big bucks.
Are you sure it's not 3%?
Strange, on the online instructions for form 2210, https://www.irs.gov/instructions/i2210, the worksheet (part IV, section B) has the rate 5% for the first quarterly period, and 3% for each subsequent quarterly period. Doesn't seem right...
First, those are the 2020 instructions. What doesn't seem right? The rate was reduced during the year and AFAIK, is still 3%.
What doesn't seem right are the differing penalty interest rates from one quarterly period to the next. In all my years dealing with form 2210, the rate has never been variable.
For tax underpayments and overpayments, the IRS has determined the interest rate on a quarterly basis for at least the last 30 years. The rate has changed intra-year in 4 of the past 6 years.
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