Underpayment Penalty!?!!

[Valjean]

I use an online tax preparation program. It told me I was liable for an
underpayment penalty. How can I be liable for an underpayment penalty if my
income is not regular, certain to happen or knowable before the close of the
tax year?

 

[Paul A Thomas]

I use an online tax preparation program. It told me
I was liable for an underpayment penalty. How
can I be liable for an underpayment penalty if my income is not regular,
certain to happen or
knowable before the close of the tax year?

At a minimum, you know about your income ~when~you~earn~it.

At that time, the taxes can be computed, and an estimated tax payment can be
made if necessary.

If your income is seasonal, or varies widely over the year, use Schedule AI
of Form 2210 to report the income, and the appropriate tax liability, for
the period(s) in which they are actually earned. This will reduce of
eliminate any underpayment penalty.

 

[Valjean]

No, I don't know about my income. Beyond bank interest, I may not have any.
And, anything else that might come my way, comes at the close of the tax
year. This is what dividends are.

 

[Phil Marti]

No, I don't know about my income. Beyond bank interest, I may not have
any. And, anything else that might come my way, comes at the close of the
tax year. This is what dividends are.

Instead of arguing meaningless points with Paul, follow his advice. The
annualized income method, Form 2210, Schedule AI, is designed for people
like you who receive income unevenly through the year. If you didn't make
any estimated tax payments you'll still owe a penalty, but the AI may reduce
the amount.

 

[Valjean]

Exactly how is it "meaningless?" When income may or may not be paid, is not
knowable at any point in time, and comes only as a surprise at year's end,
if then... I'm at a loss to know, in other words, how this unexpected
"windfall" is something you already know of, and/or can, too!

 

[Valjean]

P.S. It seems, after trying some more, that online tax software differs.
Some is sophisticated (takes you into account), while some is not....

 

[Paul A Thomas]

Exactly how is it "meaningless?" When income may or may not be paid, is
not knowable at any point in time, and comes only as a surprise at year's
end, if then... I'm at a loss to know, in other words, how this unexpected
"windfall" is something you already know of, and/or can, too!

As I said, you know about it when you receive it. At that point in time,
you can make an estimated tax deposit. Even if ALL your income was received
on the last day of the year (at 11:59 pm even) you can make an estimated tax
deposit by January 15th and avoid a penalty.

 

[Valjean]

Except when you haven't had to pay taxes the previous tax year. Then, there
is no penalty, and basis for that. Two other software packages say this. The
earlier (and first) one I consulted did not bother to consider it. Did you,
too...

 

[Paul]

Except when you haven't had to pay taxes the previous tax year. Then,
there is no penalty, and basis for that. Two other software packages say
this. The earlier (and first) one I consulted did not bother to consider
it. Did you, too...

The rules for making estimated tax deposits, and avoiding any underpayment
penalty, vary with the circumstances (farmers come to mind), and it's
entirely possible to avoid all estimated taxes if you can file your return
and pay the full amount of tax due by January 31st (at least it used to be
that way).

No, I do not consider each and every possible combination of exceptions and
"what if's" in my replies to someone who is not a client.