Help me understand Underpayment Penalties

[Spork]

Background: I am FIRE and had 2016 income planned to hit 200% FPL AGI for ACA.  Early in the year, my dad passed away and I quickly shifted gears.  Since I had no idea what sort of income various inheritance would create, I re-engineered income to hit right at the bottom of the ACA qualifications, just above Medicaid.

It's 5 days into 2017 and I just found out that I'm getting an additional taxable income (for last year) that will push me to right about 400% FPL.  Hopefully I will end up slightly under to retain some of my subsidy.  I don't have the exact numbers yet.  In fact, the money has not been distributed.  But I'm told it will count against 2016.

I'm reading through the IRS underpayment guidelines.  I think I basically get the gist of it.  I'm looking at the instructions for Form 2210 (https://www.irs.gov/pub/irs-pdf/i2210.pdf) and I notice on page 2 under "Waiver of Penalty":

The underpayment was due to a casualty, disaster, or other unusual circumstance, and it would be inequitable to impose the penalty.

Does anyone with experience with this have any idea if this waiver will apply?  I had no idea I was receiving the income during 2016.  I haven't even received it yet in 2017.

I also know, from previous experience with the accountant handling the estate that he will inevitably be months late getting the schedule K form to me.  (This is the same guy that took 9 months to figure out I had additional income coming.)   I believe he's a really nice guy and produces a reasonable tax return, but his body will likely be delivered to his funeral 6 days after he is buried.  He couldn't meet a tax deadline if he was given an infinite amount of time to work on the numbers.  This means that likely when I do file the Form 2210, it will be next summer or fall, when I have the data to file my return.

[Warhead]

If you did not receive the money in 2016 then as I understand it it should not count as income for 2016...

It is beneficial to stay under 400% of the federal poverty limit if your income increases as there are limits to how much excess subsidy the government can claw back as long as you are under 400% or 300% or 200% cut offs.

http://obamacarefacts.com/advanced-tax-credit-repayment-limits/

[Frankies Girl]

I had a very late K-1 form after my dad died that threw me into owing over 2k in tax. I had to file an amended return, and put in the notes section that this was due to my dad's death and my not being informed of the additional income from the estate until after I'd filed. I received no penalty for the underpayment. I didn't have to file any other forms - just submit the amended return and K-1 file.

Not sure about how likely it is if you will lose your subsidy tho, or if they will assess a penalty for underestimating for the purposes of the ACA subsidy either (I was still working and on employer insurance).

[Spork]

If you did not receive the money in 2016 then as I understand it it should not count as income for 2016...

I would think the same thing. The accountant says he has 65 days in 2017 to finish off the books on 2016.  To be clear: the money was distributed to the estate in 2016.  I had thought the estate would pay the tax, then distribute.  Accountant says that ain't how it works.  At what he charges, I assume he's right.

[Spork]

I've found the underpayment penalty is pretty small compared to the tax payment the penalty is based on.  For example let's say you owe an additional $5000 come tax time.  The underpayment penalty will be around $100.  Yes, the penalty might get waived, but you're still on the hook for $5000.  If it turns out you have to pay the penalty it's $5100.  Not a big difference, it's not much more than you would have earned in interest on that amount.

If I have to pay 15% plus repay ACA subsidies, it's going to be a lot more than $5k.  But I guess if penalties are that small, that's "good", right?

[Spork]

I've found the underpayment penalty is pretty small compared to the tax payment the penalty is based on.  For example let's say you owe an additional $5000 come tax time.  The underpayment penalty will be around $100.  Yes, the penalty might get waived, but you're still on the hook for $5000.  If it turns out you have to pay the penalty it's $5100.  Not a big difference, it's not much more than you would have earned in interest on that amount.

If I have to pay 15% plus repay ACA subsidies, it's going to be a lot more than $5k.  But I guess if penalties are that small, that's "good", right?

I see, the bigger issue is having to pay the higher healthcare premium due to reduced subsidy.  The underpayment penalty will be tiny in comparison.  In any case, more income is always a good thing right?  The income will still be greater than the taxes, healthcare, and penalty combined, so still a win.

Oh, you're absolutely right.  I'm just a frustrated -- mostly from lack of communication/documentation from an accountant.  Everything is fine in the end.

I had done some last minute Roth conversions at the end of the year to try to keep from falling off the BOTTOM of the ACA chart.  This morning I'm working on rolling them all back so I don't fall off the top of the ACA chart.  Of course, until actual documentation arrives, I've got no idea where I'll land.

[whiskeyjack]

Would I be prying too much to ask what you've inherited that is increasing your income?   I inherited money this year but I've been under the impression that it's not taxable and will not count as income on my federal return.   I'm not about to be surprised by something, am I?

[Warhead]

Found this...

http://dontmesswithtaxes.typepad.com/dont_mess_with_taxes/2010/12/constructively-received-income-or-what-tax-year-applies-to-late-year-payments.html

"When is the money yours? Let's start with the IRS concept of constructively received income.

"Handing over money Essentially, this is when you have control over the money. What you decide to do with that money is immaterial. The IRS is just interested in whether you could do something with it."


If you did not have control of the money in the estate in 2016 I do not see how that can be income received in 2016...

Tax is complicated though maybe there are more intricacies to it.

[Spork]

If you did not have control of the money in the estate in 2016 I do not see how that can be income received in 2016...

Tax is complicated though maybe there are more intricacies to it.

I don't understand it either.  It may also be creative accounting on accountant's part to make sure the estate closes with 2016.  I do know if I get a Schedule K1 (from him) that says I owe taxes for 2016, then I'm going to pay them.  It's not worth arguing with the IRS over.

[CareCPA]

Would I be prying too much to ask what you've inherited that is increasing your income?   I inherited money this year but I've been under the impression that it's not taxable and will not count as income on my federal return.   I'm not about to be surprised by something, am I?

It depends on what you inherited. If you just inherited cash/personal items, it will not be counted as income for tax purposes. If you inherited an annuity, 401k, or similar, then it will be taxed for income - when it gets taxed for income depends on the timing of distribution.

[Spork]

Would I be prying too much to ask what you've inherited that is increasing your income?   I inherited money this year but I've been under the impression that it's not taxable and will not count as income on my federal return.   I'm not about to be surprised by something, am I?

It depends on what you inherited. If you just inherited cash/personal items, it will not be counted as income for tax purposes. If you inherited an annuity, 401k, or similar, then it will be taxed for income - when it gets taxed for income depends on the timing of distribution.

Yes, in this case it is a life insurance policy that is somehow structured as an annuity.

As to the original "will I be surprised?"  ... There certainly may still be more surprises.  Only tax documents will tell...

[whiskeyjack]

Would I be prying too much to ask what you've inherited that is increasing your income?   I inherited money this year but I've been under the impression that it's not taxable and will not count as income on my federal return.   I'm not about to be surprised by something, am I?

It depends on what you inherited. If you just inherited cash/personal items, it will not be counted as income for tax purposes. If you inherited an annuity, 401k, or similar, then it will be taxed for income - when it gets taxed for income depends on the timing of distribution.

Yes, in this case it is a life insurance policy that is somehow structured as an annuity.

As to the original "will I be surprised?"  ... There certainly may still be more surprises.  Only tax documents will tell...

That makes sense, thanks.  It was handed to me as cash and I haven't been able to figure out where it came from. 

I'll keep an eye out for tax documents I don't recognize.

[Reynold]

Would I be prying too much to ask what you've inherited that is increasing your income?   I inherited money this year but I've been under the impression that it's not taxable and will not count as income on my federal return.   I'm not about to be surprised by something, am I?

Just getting money in an inheritance will not (usually, there are a couple of states that have inheritance taxes as well as estate taxes, NJ is one) mean you have to pay taxes on that money.  However, while the money is going through the estate settlement process it can generate things like capital gains and losses which "carry through" to you.  I inherited money from my father who passed away late in 2015, and while the executor resolved the estate fairly quickly, there were some capital losses during the time the estate was being resolved which were passed on to me in 2016 on a K-1.  I took the opportunity to do some capital gains harvesting in 2016 to allocate against the losses.  It is definitely good to stay in contact with whoever is resolving the estate to see what is going on.

Also make sure you get a new cost basis for any assets you inherit, by the way, it will be a pain in the neck to try to go back and get it 10 years later when you sell that IBM stock or whatever.