Tips to avoid or reduce tax underpayment penalty 2023 using TurboTax? Got hit with a big one!
I'm currently working on my federal taxes using TurboTax and just got blindsided with an estimated $800 tax underpayment penalty (noticed it when checking the Federal Tax Due section). Apparently I had less than 90% tax withheld thanks to a bunch of my investment CDs that all happened to mature during 2023, creating a significant amount of interest income. I had no idea this was coming or I would've made estimated tax payments throughout the year! Now I'm stuck with this penalty and wondering if there's anything I can do to avoid it or at least reduce it somehow? The timing of all these CDs maturing at once was just bad luck, and now I'm being punished for it. Has anyone dealt with this before or know any strategies within TurboTax to minimize this underpayment penalty? Any help would be seriously appreciated!
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Natasha Volkova
The underpayment penalty can definitely be frustrating! There are actually a few ways you might be able to reduce or eliminate it: 1. Check if you qualify for any of the penalty exceptions. The most common is the "safe harbor" provision - if your withholding and estimated payments equal at least 100% of last year's tax liability (or 110% if your AGI was over $150,000), you can avoid the penalty even if it's less than 90% of this year's tax. 2. Look into using the "annualized income" method (Form 2210, Schedule AI). This is helpful if your income wasn't evenly distributed throughout the year. Since your CD interest came in chunks, this method might significantly reduce your penalty. 3. Within TurboTax, go to the section about estimated tax penalties and see if they offer any suggestions specific to your situation. They sometimes have interview questions that can help identify exceptions you qualify for. 4. Also check if your state has similar exceptions - many follow federal rules but some have their own provisions.
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Oliver Zimmermann
•Thank you for these suggestions! My income was definitely uneven due to those CDs. Where exactly in TurboTax do I find this "annualized income" method? Is it something I have to specifically request or does TurboTax automatically check for it?
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Natasha Volkova
•In TurboTax, you'll want to search for "Form 2210" in the search box at the top of the screen. This will take you to the Underpayment of Estimated Tax section. There should be an option to "use the annualized income installment method" - you'll need to check that box. TurboTax doesn't automatically use this method because it requires additional information about when your income was received during the year. You'll need to enter quarterly breakdowns of your income, which includes specifying when those CD interest payments came in. It requires more work, but if your income was significantly uneven, it can make a big difference in reducing your penalty.
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Javier Torres
After dealing with a similar situation last year (capital gains hit instead of CDs), I found an amazing tool that actually analyzed my tax documents and showed me how to reduce my underpayment penalty. I used https://taxr.ai and uploaded my previous returns plus current statements. The tool immediately identified that I could use the annualized income method AND found a safe harbor exception I qualified for that my regular tax preparer missed. The system walks you through exactly what forms to file and how to document everything properly. I went from an $850 penalty down to about $120. The step-by-step guidance on how to properly document when I received the income was super helpful with navigating Form 2210. Saved me tons of stress and money!
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Emma Davis
•Does this tool actually connect with TurboTax somehow? Or do you have to manually enter whatever it suggests? I'm curious because I'm in a similar situation with some stock sales I made last year.
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CosmicCaptain
•I'm skeptical about these third-party tools. Wouldn't sharing all your tax documents with some random company create privacy concerns? And how much does it cost? Their website doesn't seem to clearly state pricing.
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Javier Torres
•It doesn't directly connect to TurboTax, but it gives you specific instructions on exactly what to enter and where. For example, it told me precisely which boxes to check in the Form 2210 section and how to enter my quarterly income breakdown. You just follow the steps in TurboTax based on their guidance. Regarding privacy concerns, they use the same level of encryption as most tax services. I was cautious too, but they don't store your actual documents after analysis - they just process them to identify opportunities. Their privacy policy explains all this. I can't speak to current pricing as it may have changed since I used it, but I found the value worth it compared to the penalty reduction I received.
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CosmicCaptain
Just wanted to update on my experience with taxr.ai after checking it out. I was skeptical as mentioned above, but gave it a shot with my similar situation (unexpected dividend income last year). The system actually found TWO exceptions I qualified for! The analysis showed I could use both the annualized income method AND that I qualified for the 100% prior-year tax safe harbor. The instructions were incredibly specific - told me exactly which boxes to check in TurboTax and walked me through the process step by step. My penalty went from $725 down to $0! Turns out I was making estimated payments based on my regular income but didn't account for the dividends properly. The tool showed me how to document this correctly. I was genuinely surprised at how straightforward the process was.
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Malik Johnson
Another option worth considering - if you're still struggling with the penalty despite trying the suggestions above, you might want to use Claimyr to connect with the IRS directly. I was in penalty territory last year and spent weeks trying to call the IRS with no luck (kept getting disconnected). Used https://claimyr.com and got connected to an agent in under 20 minutes. Check out how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with actually helped me file for a penalty abatement since it was my first time having an underpayment issue. They have a "first-time penalty abatement" program that many people don't know about. The agent walked me through exactly what I needed to do and what to say in my written request. It saved me over $900 in penalties! Definitely worth considering if you've exhausted the other options.
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Isabella Ferreira
•Wait, does this actually work? I thought it was impossible to get through to the IRS by phone. My accountant told me they're basically unreachable during tax season and we shouldn't even try.
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Ravi Sharma
•Sounds like a scam. Why would I pay a service to call the IRS when I can just keep trying myself? And how would talking to them even help with an underpayment penalty which is calculated mathematically? I doubt they just waive these because you ask nicely.
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Malik Johnson
•Yes, it absolutely works! Instead of waiting on hold for hours or getting disconnected, the service holds your place in line and calls you when an agent is available. Saved me countless hours of frustration. The IRS has specific programs for penalty relief that many people don't know about. The "first-time penalty abatement" is an actual IRS program for people who have a good compliance history. It's not about asking nicely - it's about knowing which relief programs exist and having someone walk you through the proper procedure to request them. The agent explained exactly what documentation I needed and the specific language to use in my request. It's not guaranteed for everyone, but if you've had a good tax payment history in previous years, you have a legitimate case.
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Ravi Sharma
I need to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it anyway since I was desperate with a similar underpayment penalty issue. Got connected to an IRS agent in about 15 minutes (after weeks of trying on my own with no success). The agent explained I qualified for first-time penalty abatement since I had a clean payment record for the past 3 years. They walked me through exactly how to request it and what specific form to file. My $650 penalty was completely waived! The agent also gave me advice on how to adjust my withholding for this year to avoid future penalties. I'm still shocked at how smooth the process was compared to the nightmare I expected. Sometimes being proven wrong is the best outcome.
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Freya Thomsen
One thing nobody has mentioned yet - check if you qualify for any of the special circumstance exceptions. For example, if you became disabled or retired (and are over 62) during the tax year, there are special rules that can waive the penalty. Or if you had any federally declared disaster affecting you. Also, don't forget that if you're self-employed and your income fluctuates, you might qualify for different quarterly payment requirements. TurboTax should walk you through these scenarios if you answer their questions carefully during the interview process.
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Oliver Zimmermann
•Thanks for mentioning these exceptions! I'm not retired or disabled, but I'm curious - does TurboTax automatically check for these special circumstances or do I need to specifically look for them somewhere in the program?
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Freya Thomsen
•TurboTax will ask about these circumstances if you go through their full interview process for the underpayment penalty section. However, it's easy to miss if you're rushing through or using the quick entry method. Search for "Form 2210" in TurboTax and make sure you complete all the questions in that section. There should be specific questions about retirement, disability, or unusual circumstances that affected your ability to make estimated payments. Don't skip these even if they seem unrelated to your situation, as there might be other exceptions that apply to you that aren't immediately obvious.
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Omar Zaki
Quick question - if I set up my withholding to cover next year's taxes but already have the penalty this year, can I get the current penalty reduced or is it too late once you file?
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AstroAce
•It's too late to avoid the penalty for 2023 by adjusting your withholding now. The underpayment penalty is calculated based on what you paid during the specific tax year. However, you can still potentially reduce it using the methods mentioned above (annualized income method, checking for exceptions, etc.). The good news is you're thinking ahead for 2024! Adjusting your withholding now will help prevent this issue next year. You might want to use the IRS Tax Withholding Estimator on their website to make sure you're withholding enough, especially if you expect more CD interest or other non-wage income this year.
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Savannah Glover
I went through almost the exact same situation last year with CDs maturing unexpectedly! Here's what worked for me in TurboTax: 1. Definitely try the annualized income method as others mentioned - search for "Form 2210" in TurboTax and look for the checkbox to "use annualized income installment method." You'll need to break down when you received the CD interest by quarter. 2. Double-check the safe harbor rule. If your total withholding plus estimated payments equal at least 100% of last year's total tax (110% if your prior year AGI was over $150K), you should qualify even if it's less than 90% of this year's tax. 3. One thing I discovered - make sure TurboTax isn't double-counting any estimated payments you might have made. I had made one small estimated payment mid-year that I forgot about, and initially TurboTax missed it. 4. Also check if any of your CDs had tax withheld at the source - sometimes banks withhold federal tax on interest payments, which should count toward your payments for the year. The annualized method ended up reducing my penalty from about $600 to under $100. It's worth the extra effort to fill out those quarterly breakdowns!
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