Are ES pmts due on penalties?

[Jill Graff]

Client wants to cash in all of his IRAs (all deductible) and purchase rental property in 2011. We have already discussed the pros and cons of that and he is going ahead with the purchase. He will be subject to the 10% early distribution penalty. Is the early distribution penalty subject to the underpayment penalty?

Thanks in advance.

[travis bickle]

The underpayment penalty

Client wants to cash in all of his IRAs (all deductible) and purchase rental property in 2011. We have already discussed the pros and cons of that and he is going ahead with the purchase. He will be subject to the 10% early distribution penalty. Is the early distribution penalty subject to the underpayment penalty?

Thanks in advance.

is based on the individual's AGI. Since your client will add the IRA distributions to his otherwise total income, the underpayment penalty will indeed be computed with the IRA distributions included.

[Jill Graff]

penalty on penalty

I know the penalty will be due on the IRA distribution, but I was curious as the whether the 10% early withdrawal penalty would be subject to the underpayment penalty.

Since the 10% penalty is considered "Other Taxes" on the 1040, and that is included in the calculation of the Form 2210, the client will be paying penalties on penalties! (Nothing like answering my own question!)

[BOB W]

I know the penalty will be due on the IRA distribution, but I was curious as the whether the 10% early withdrawal penalty would be subject to the underpayment penalty.

Since the 10% penalty is considered "Other Taxes" on the 1040, and that is included in the calculation of the Form 2210, the client will be paying penalties on penalties! (Nothing like answering my own question!)

If the T/P had made an ES tax payment at the time of the IRA distribution there would be no underpayment penalty. Although you may have to do the Annualized Method Form 2210.

[Jiggers]

2210 Penalty

is based on the individual's AGI. Since your client will add the IRA distributions to his otherwise total income, the underpayment penalty will indeed be computed with the IRA distributions included.

I don't think that the 2210 Underpayment Penalty is based on the AGI.

[appelman]

Semantics

The 10% "penalty" is basically a surtax. The underpayment "penalty" is basically interest on the difference between what should have been paid and what was paid. And yes, the 10% contributes to what should have been paid.