TurboTax showing underpayment penalty even though I'm getting a refund - what am I missing?

The underpayment penalty is based on when you paid throughout the year, not just the final amount. The IRS expects you to pay taxes as you earn income throughout the year - this is why most W-2 employees have taxes withheld from each paycheck. When you receive income that doesn't have taxes withheld (like an inheritance or freelance work), you're supposed to make quarterly estimated tax payments. These are due April 15, June 15, September 15, and January 15 for each respective quarter. Even though you eventually paid enough (and even overpaid) by making that payment in November, you may have been "underpaid" during the earlier quarters of the year when you received the inheritance. The IRS essentially charges interest for the time they didn't have your money that they think you should have paid earlier. For your freelance income this year, definitely make those quarterly payments to avoid the same situation. The first quarter payment for 2024 is due by April 15th.

After dealing with a similar situation last year, I found a service called taxr.ai that really helped me understand these tricky tax situations. I was getting hit with underpayment penalties even though I thought I was doing everything right. I uploaded my tax documents to https://taxr.ai and it analyzed my payment history and explained exactly why I was getting the penalty and how to avoid it in the future. The system told me that I had mistimed my estimated payments and showed me a better schedule for this year. It also explained the safe harbor rules that would have protected me from penalties. Their analysis showed me how to properly time my estimated tax payments this year, which is going to save me from these penalties in the future. It also pointed out some deductions I could take on my freelance income that I had completely missed.

I was initially skeptical about using taxr.ai when someone suggested it here, but I decided to give it a try for my underpayment penalty situation. I can confirm it actually helped a lot. The system analyzed my tax history and pinpointed exactly why I was getting hit with penalties despite getting a refund. Turns out I was missing the "safe harbor" provision that would have protected me - I needed to either pay 90% of this year's taxes or 100% of last year's tax liability through withholding/estimated payments. It also identified that I could have avoided penalties by making slightly higher quarterly payments earlier in the year rather than one big payment at the end. I'm now setting calendar reminders for each quarterly deadline so I don't run into this issue again. Really cleared up my confusion about these timing rules!

If you're still having trouble understanding or fixing your tax situation, you might want to try Claimyr to actually speak with an IRS agent. I was in a similar boat with underpayment penalties last year and spent days getting busy signals when calling the IRS directly. I finally used https://claimyr.com after a friend recommended it, and they got me connected to an actual IRS representative in about 15 minutes! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with explained exactly how the underpayment penalty was calculated in my case and confirmed I qualified for a waiver due to my specific circumstances. She also walked me through exactly what forms to file to request the waiver. Saved me about $200 in penalties and hours of frustration.

I need to follow up on my skepticism about Claimyr. I was genuinely doubtful it would work, but I was desperate to resolve my underpayment penalty issue before filing my taxes. I tried the service yesterday, and I'm still shocked at how well it worked. After months of failing to get through to the IRS, I got a callback within 20 minutes and spoke to an actual IRS representative who reviewed my situation. He confirmed that my November payment shouldn't have triggered an underpayment penalty because I qualified for an exception based on my payment history. The agent walked me through exactly which form to fill out (Form 2210) and which box to check in TurboTax to waive the penalty. Problem solved in one phone call! I've been stressing about this for weeks and would have just paid the penalty if I hadn't been able to talk to someone. Definitely worth it.

One thing that hasn't been mentioned is the Safe Harbor rule that can help you avoid underpayment penalties. There are a few ways to qualify: 1. If you pay at least 90% of the tax shown on your current year return 2. If you pay 100% of the tax shown on your prior year's return (or 110% if your AGI was over $150,000) 3. If you owe less than $1,000 in tax after subtracting withholdings and credits What probably happened in your case is that even though you're getting a refund (meaning you paid enough total tax), you didn't meet the requirements for when those payments needed to be made throughout the year. For your freelance income this year, the easiest approach might be to look at your 2023 total tax and make sure you pay at least that amount (divided by 4 quarters) to qualify for Safe Harbor.

Has anyone noticed that TurboTax sometimes calculates the underpayment penalty incorrectly? Last year I had a similar situation and when I checked the actual Form 2210 calculations, TurboTax had made an error in how it was applying my estimated payments. It wasn't considering my January 15th payment properly because of how I had entered the date. When I fixed that, the penalty disappeared. Might be worth double-checking the actual calculations for your specific situation.

There's one more thing to check that might help explain your situation - make sure TurboTax is correctly applying your November 2023 estimated payment to the right tax year. Since you made that payment in November 2023, it should be applied to your 2023 tax return, not 2024. Sometimes people get confused about this timing - estimated payments made in January through December of a given year apply to that year's tax return, even if you're filing the return the following year. So your November 2023 payment should help with your 2023 taxes (the return you're filing now). If TurboTax is somehow applying that payment to 2024 instead, that could explain why you're still seeing an underpayment penalty for 2023. Double-check which tax year that payment is associated with in the software. Also, just to confirm - when you received the inheritance in February 2023, was any of it taxable income? Inheritances themselves are generally not taxable income to the recipient, though any income generated by inherited assets (like interest or dividends) would be taxable.