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I have recently completed my first US tax return with TurboTax. There was some tax underpayment and penalty, and Turbotax has also produced forms 1040-ES for the (required) quarterly estimated payments of the 2002 tax.

I am trying to figure out if I have to pay a penalty next year if my tax for 2002 works out to be higher than this year.

According to Form 2210 there is no penalty to pay if Line 11 is equal to or more than Line 14, where L14 is smaller of L10 (90% of the actual 2002 tax) or L13 (the actual 2001 tax, AGI less than $150K). Therefore even if the actual 2002 tax is much higher than the 2001 figure (i.e. L10>L13), L14 = L13 and there is no penalty if L11 is equal to or more than L13, the actual 2001 tax.

Now, Turbotax has computed the advance/estimated payments so that with the 2002 W-4 withholding (assumed by it as the same as the 2001 figure without asking me!) the total tax payment will be at least equal to the 2001 tax. Therefore, if we put this figure on L11 then according to the above rule there should be no penalty.

But, on line 11 the Form says,

"11 Withholding taxes. Do not include any estimated tax payments on this line (see instructions)".

I searched the IRS website but could not find the instructions. I do not understand why the four quarterly advance payments are not to be included on this line.

I was wondering if I could satisfy this requirement by not making the quarterly estimated payments but by increasing the W-4 withholdings such that the total payment is the same.

I would appreciate if one of our tax-expert Fools could help.


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