Figuring Estimated Tax Penalty

Annualized income installment method

If you did not receive your income evenly throughout the year, your required installment for one or more payment periods may be less than 1/4 of your required annual payment. You may be able to lower or eliminate your penalty by figuring your underpayment using the annualized income installment method. To figure your underpayment using this method, complete Schedule AI of Form 2210. You must file the form and Schedule AI with your tax return.

Actual withholding method

Instead of using 1/4 of your withholding to figure your payments of estimated tax, you can choose to use the amounts actually withheld by the due dates. Using your actual withholding may result in a smaller penalty if most of your withholding occurred early in the year.

If you are filing Form 2210, complete:

• Part I (which figures your required annual payment),
• Part II (which identifies your reasons for filing Form 2210), and

Either

• Part III (the short method for figuring your penalty) or
• Part IV (the regular method for figuring your penalty).

The regular method requires you to figure your underpayment and penalty for each payment period. The short method in Part III of Form 2210 is less complicated than the regular method. You figure your penalty under the short method as a percentage of your total underpayment. You can use the short method only if you made no estimated tax payments during the tax year or your paid your estimated tax in four equal payments. If you use the short method, you cannot use annualized installment method or the actual withholding method to reduce or eliminate your penalty.

If you figure the penalty yourself, enter the amount of the estimated tax penalty on line 77 of Form 1040. If you owe tax on line 76, add the penalty to your tax due and show the total amount you owe on line 76. If you are due a refund, subtract the penalty form the overpayment you show on line 73.