Tax Q&A;: Underpayment Penalty

Q: Is there an exception to the under-withholding penalty if the only reason a penalty would be owed is due to the additional taxable income produced from the conversion of a traditional IRA to a Roth IRA? I’ve elected to spread the conversion income over four years and did not pay in 100% of my 1997 tax liability in 1998 via withholding and estimated taxes. I couldn’t find any warnings in government publications on the Roth IRA conversion procedures about paying additional estimated taxes on the conversion income.

A: There is no exception to the underpayment penalty because of conversion to a Roth IRA. You might, however, be eligible for one of the other exceptions to the underpayment penalty.

You stated that you do not qualify for one of the exceptions, which would have applied if you had withheld in 1998 at least 100% of the previous year’s (in other words, what you owed for tax year 1997) tax bill. You might still avoid penalties if you’ve already paid in 90% of the tax you owed for tax year 1998. You may also use the annualization method to reduce or eliminate any penalties if your income was received unevenly during the year. This could help if you converted your IRA late in the year. That’s because the annualization method can help you demonstrate that your withholding and other tax payments were made in proportion to the income you received during the year. The actual formula is too complicated to outline here, but you can use IRS Form 2210 to calculate it.

--EDWARD R. RICH, Thousand Oaks

For more information on taxes and to see other questions and answers in this series, go to The Times’ Web site at http://ukobiw.net/taxes. To find a CPA, visit the California Society of CPAs at https://www.calcpa.org.