Therefore it seems like we have to manually override the program ourselves and enter the additional tax liabilities into the worksheets (which can be accessed directly or interactively through the "other taxes" questionaire) for both federal and state (I heard for the federal part TaxCut actually flags an error for code z during the final check and it will take you to the corresponding worksheet, but you still have to enter the extra tax penalty amount manually. For the state part there is no final check however--since the tax laws governing the tax laws are different for each state). I am not a tax accountant, but it appears that we have to manually add the extra taxes as follows:
- 20% of the reported as code z in box 12 of the W-2 (plus interest penalties if any) for federal tax. Enter this amount interactively or manually as "NQDC" on the dotted line left of line 63 on 1040.
- 20% of the reported as code z in box 12 of the W-2 (plus interest penalties if any) for state tax. Enter this amount interactively or manually as "NQDC" on the dotted line left of the corresponding line on the state tax form (for CA 540 it is line 33).