Underpayment Penalty Calculations

[GodFather]

High earner has a tax penalty for underpayment.  Here is some information:

- 2023 Total Tax = $135,360 (110% of this is $148,896)

- 2024 Withholdings $113,328 + additional Medicare tax $3,944 = $117,172

- Estimated Payment was made on 12/23/24 $25,000

- Total 2024 payments $142,172

- 2024 Total Tax $148,288 (90% is $133,459)

- Amount due is $6,598 with $482 of that being an estimated tax penalty.  

Based on this information, is the penalty due to not having had actual 2024 withholdings amount to at least $133,459?  Appreciate any thoughts on this. 

[IRonMaN · Accepted solution]

Withholding was short for the year and an estimate payment that late in the year doesn't help much more than paying the balance due with the return unless a chunk of their income came in the fourth quarter.

As a side note, Bob should be checking in sometime regarding paying the penalty.

[GodFather]

Thanks, Iron...so the short withholding is what caused the penalty, basically.  

[IRonMaN]

Yup

[BobKamman]

For decades, IRS hasn't assessed the penalty if it's under $100, so I haven't added it to the balance due.  Last year I had a client who rushed to get the return filed before April 15, but it still wasn't soon enough to avoid the $102 notice that IRS sent.  This year, all bets are off.  IRS doesn't have the people to answer the phones or process the adjustments for penalties, which are disliked by the MAGA crowd anyway.  I included it with one client's return, but told another the amount to expect and asked that he let me know if it was assessed.  Inform your clients, then let them decide.  

Slava Greenland!

[qbteachmt]

Additional Medicare isn't part of income tax withholding Safe Harbor. It's reported in a different box on the W2 and goes to a different fund. Yes, it's withholding. No, it's not for income tax.

"not having had actual 2024 withholdings amount to at least $133,459?"

It's based on payments through any combination of estimates + withholding.

[BobKamman]

Additional Medicare Tax Withholding is considered a payment for purposes of completing Form 2210.  From Form 8959 it goes to line 25(c) of the 1040, then becomes part of the total withholding on Line 25(d). Form 2210 instructions:  

Line 6
Include the taxes withheld shown on the following lines:
• Form 1040 or 1040-SR, line 25d

[qbteachmt]

Yes, Bob, but if the initial Safe Harbor math had been done on Income tax withholding only, there would not be a Form 2210 at all. It's better to be using the right number to start with.

[BobKamman]

@qbteachmt   You don't understand the numbers.  The $3,944 is a credit, that counts as additional withholding.  If only the lower number of $113,328 is used, the penalty is even higher.  

[qbteachmt]

"If only the lower number of $113,328 is used, the penalty is even higher."

We're obviously looking at this differently, Bob. You don't need to describe it as not understanding the numbers. I look at the number to use for Safe Harbor that will prevent ever needing to compute a penalty or having Form 2210 in the first place. It's a different perspective.

"2024 Withholdings $113,328 + additional Medicare tax $3,944 = $117,172" it is $117,272.

[IRonMaN]

Since GodFather got his answer over 24 hours ago, maybe the two of you want to start a new post to continue your discussion so that you don't keep interrupting his Sunday afternoon nap.  🤔

[BobKamman]

@IRonMaN He's not the only one who needs correct information.  Thousands of TurboTax users come here for answers, and we can't allow them to be misled.