Underpayment Penalty

[Bluelex18]

I took a look at my wife's W2 and realized that there was very little if anything taken out of her checks and so as I've started to work through Turbotax and input the information It's showing that I will be hit with the Underpayment Penalty.  We are filling Married Filling jointly so I guess I have a couple questions:  First should I just complete my taxes via Turbotax and wait for the IRS to send us a bill on underpayment penalty or is there a way to calculate that amount and secondly, would the penalty be on my portion of the income or just on my wife's portion because not enough taxes were taken out on hers?  

FYI....This is approximately 10,000 in income, which I believe only 27 dollar of it got withheld from federal.

[dmertz]

TurboTax allows you to choose to have TurboTax calculate an estimated penalty and include that amount in your balance due or you can elect to not include that in your balance due and have the IRS just bill for the penalty.

On a joint tax return paying taxes is a joint responsibility, so there is joint responsibility for any underpayment.  There is no separate accounting for tax liability.  Tax withholding by either spouse is credited against the joint tax liability.

[xmasbaby0]

Going forward, your spouse could change her W-4 and have more withheld from her paychecks to avoid this situation for tax time next year.

https://www.irs.gov/individuals/tax-withholding-estimator

https://www.irs.gov/pub/irs-pdf/fw4.pdf

[Bluelex18]

If we just file it without paying the penalty upfront and wait for IRS to basically send us a bill is there any interest that is tagged on to the amount?? Basically I’m asking is there a benefit to paying it with my taxes right now vs waiting for a bill?

[Critter-3]

If you pay the tax bill in full by 4/15 then  there will be no interest on any penalty the IRS may or may not access on the return. 

[SteamTrain]

But truely....wait until February sometime mid-month to e-file.

You need to make absolutely sure you've entered everything in your tax file.

If you own any investments/mutual funds in non-retirement accounts, any of those distributions will be reported  on forms you need to have entered in your tax return (even if $$ rolled back into the holdings)

Even any pittance of interest from bank accounts, amounting to 50cents or higher.

[Bluelex18]

Another question is if I put let’s say 5,000-6,000 towards a Roth IRA or IRA to get my federal taxable income down… and make it so I don’t owe anything will I will be subject to the underpayment penalty??? Or will that go away since I would no longer owe taxes.

[VolvoGirl]

It would have to be to a Traditional IRA not ROTH.  It may help, I'm not sure.

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.

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

[Bluelex18]

Correct so my question is if I deposit money into a IRA account and offset the amount that is owed does the underpayment penalty go away or am I assessed the penalty no matter what I do?

[dmertz]

If your modified AGI for the purpose of being able to deduction a traditional IRA contribution permits, enter a proposed traditional IRA contribution and see.  It appears that both of you are eligible to make traditional IRA contributions which, if deductible, would reduce the underpayment penalty.

If your AGI is low enough, a Roth IRA contribution might result in some amount of Retirement Savings Contributions Credit that would reduce the underpayment penalty.

[Bluelex18]

Right but if I put enough in an IRA that it offsets the amount of owed taxes let’s just say I owe 1,200 and I put let’s just say 6,000 in a IRA and now it’s showing I don’t owe anymore does that remove the underpayment penalty all together?

[dmertz]

It will reduce, but perhaps not eliminate tax underpayment for tax quarters 1 through 3 even though you end up with a zero balance due.  Try it and see.

The US tax system is pay as you go and whether or not you have an underpayment is evaluated on a quarterly basis.  Because income is treated by default as having been received evenly throughout the year, a deductible IRA contribution will reduce each quarter's income by 1/4 of the deductible amount.  That might not be enough to totally eliminate the underpayment for the earlier tax quarters, but it will at least reduce it.