Getting an Underpayment Penalty from TurboTax While Receiving a Refund - What Am I Missing?

This is actually a common confusion! The underpayment penalty isn't about whether you owe taxes at filing time - it's about WHEN you paid throughout the year. The IRS wants you to pay taxes as you earn income, not all at the end. When you received that inheritance, you should have made estimated tax payments within the quarter you received it. The penalty is essentially interest for not paying at the right time, even though your total payments for the year ended up being more than enough. It's similar to how your regular job withholds taxes from each paycheck rather than paying it all in April. The IRS expects similar timing for other income sources. For your inheritance, they likely expected payments in the quarter you received it, not in the final quarter of the year. And you're absolutely right about making a Q1 payment for your freelance income! The estimated tax payment due dates for 2024 are April 15 (Q1), June 17 (Q2), September 16 (Q3), and January 15, 2025 (Q4).

I had this exact same problem with TurboTax last year! The underpayment penalty is so frustrating. I found that using https://taxr.ai helped me figure out exactly where the discrepancy was coming from. I uploaded my documents and it identified that I'd made payments in the wrong quarters too. The weird thing about the underpayment penalty is that it doesn't matter if you're getting a refund. It's all about WHEN you paid during the year, not the total amount. I'd recommend having them analyze your situation because they can show which quarter triggered the penalty and help plan for 2024 so you don't get hit again.

Just wanted to update that I tried taxr.ai after seeing it mentioned here. I had a similar issue with getting hit with an underpayment penalty despite getting a refund. The service identified that I needed to use Form 2210 to show that I had a sudden increase in income in the 3rd quarter (from a big freelance project), which reduced my penalty substantially. I also discovered that I qualified for safe harbor protection for this year by making sure my withholding covers 100% of last year's tax (110% since my income is over $150k). This is super helpful for planning my estimated payments for 2024! Never would have figured this out on my own or even with TurboTax's explanations.

If you're still facing issues with understanding your tax situation, I'd recommend calling the IRS directly to get clarification. The problem is their wait times are absolutely insane this time of year - I was on hold for over 2 hours last week. I found this service called https://claimyr.com that helps you skip the IRS phone queues. They basically hold your place in line and call you when an IRS agent is about to pick up. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c I was skeptical at first but it saved me from wasting an entire afternoon. The IRS agent was able to explain my underpayment penalty situation and even helped me understand which form to file to potentially get it reduced.

Just wanted to follow up about that Claimyr service that holds your place in the IRS queue. I was totally skeptical (as you can see from my previous comment), but I was desperate to get answers about my underpayment penalty before tax deadline. I actually tried it yesterday and I'm shocked to admit it worked perfectly. I got connected to an IRS agent in about 35 minutes total (versus the 2+ hours I spent last time). The agent explained that my underpayment penalty was because I didn't pay enough in the early quarters, but then helped me fill out Form 2210 to use the annualized income installment method, which reduced my penalty significantly because my income wasn't even throughout the year. I hate being wrong on the internet but this actually saved me money and a ton of stress!

To directly answer your question, here's what's happening: the IRS has a "pay as you go" system. You need to pay taxes either through withholding or estimated payments throughout the year. The way to avoid underpayment penalties is to meet one of these safe harbors: 1. Pay 90% of current year tax through withholding/estimated payments 2. Pay 100% of last year's tax (110% if your AGI was over $150k) 3. Owe less than $1,000 at tax time The key thing is these payments need to be made QUARTERLY. Even though you paid enough total by the end of the year, you didn't make the payments early enough in the proper quarters. For your freelance income, definitely make that Q1 payment today! The underpayment penalty isn't huge (it's basically an interest charge), but it's still annoying to pay.

I've seen this happen with TurboTax plenty of times. The software is just following the tax code, which says you need to pay throughout the year. What most people dont know is that your inheritance itself isnt taxable income! But if you sold investments or property that you inherited, the gains are taxable. And there's something called "step-up in basis" where inherited assets get valued at the date of death, not the original purchase price. So only gains after that point are taxable. Check if maybe you sold some stocks or something after inheriting them? That would explain the capital gains tax. But either way, the penalty is about WHEN you paid, not IF you paid enough total.

Great thread everyone! I'm dealing with a similar situation and this has been super helpful. One thing I want to add is that you can also use Form 2210 to request a waiver of the underpayment penalty if you had reasonable cause - like a sudden change in income, casualty loss, or other circumstances beyond your control. Also, for anyone making estimated payments, remember that the IRS allows you to pay online through EFTPS (Electronic Federal Tax Payment System) or IRS Direct Pay. Just make sure to keep records of when you made each payment since the timing is so important for avoiding penalties. The safe harbor rules mentioned earlier are really key - if your AGI last year was under $150k, you just need to pay 100% of last year's tax liability through withholding and estimated payments to avoid any penalty, regardless of how much you actually owe this year.