Form 2210

[Christian]

With the extension deadline approaching I decided to prepare Form 2210 which I have never tackled before. Using schedule A1 I don't fully understand if you use the full amount of deductions on line 1 and in columns a, b, c, and d or more likely divide the deductions by four which is to say one quarter of the deductions assigned to each column. Likewise I would expect the self employment and Net Income Investment Tax to be divided by four also. Or do you divide these items by four and since the income is increasing each quarter increase the deductions by the same amount. The instructions seem opaque on this point. Normally I have no need to deal with this form but 2020 proved to be anything but a normal year for me. Any help is much appreciated.

[Margaret CPA in OH]

In the few times I've annualized on 2210, I prepared a spreadsheet and got real numbers from the clients.  For the columns, note that they are not perfect quarters so I would not take quarter amounts.  It isn't impossible to get real figures from monthly statements and, if for self employment, the financials from the client - well, shouldn't be impossible. 

[TexTaxToo]

15 hours ago, Christian said:

I don't fully understand if you use the full amount of deductions on line 1

Line 1 contains only income, expenses, adjustments for the partial year only.  That is, items which were received or paid during that period.  Similarly, line 4 contains only deductions paid during that period.  The column periods are not quarters, they are year-to-date.

These are then annualized so everything after line 6 is based on the full year (as if their AGI for the year was the amount in line 3).  Nothing gets divided by 4.

The annualized self-employment tax is calculated separately in Part II.

[Christian]

So much for doing tax work late at night.  I see these are not quarters but incremental increases throughout the year. I have all my statements needed to compile this info so no problem there. My problem is that I cannot just divide my total agi by the time periods in a,b,c. My income fluctuates so that would not be correct. In 2020 I had some$16,494 worth of adjustments deductible from my total income and therein lies my problem. Do I apportion this amount to conform with the income reported in those lines ? If I deduct the full amount of the deductions in each time period a,b,c I don't see how that could be correct. I just reread TexTAXToo response and it seems to support a division of the deductions as I stated above. Like so much of tax work hashing this stuff over helps. This form is if anything a little confusing (at least for yours truly) so I appreciate any comments.

[Margaret CPA in OH]

If you think of the columns as specific periods of time with each succeeding column including the prior year to date, it should be possible if, as you say, you have all the statements.  So were you to look at all (net)income on March 31, that would be the first line, column (a).  Then for (b), look at all (net)income from the first of the year or year to date which will include column (a).  Likewise for (c) and (d).  It may be helpful to create a spreadsheet to do this listing all income items that you would see on the tax form whether or not you have any Jan. 1-March 31.  If you will have any at any point, it goes in that column year to date. 

Maybe get some rest, reread the instructions, follow what TaxTexToo, described, and try again.  Think about if you were preparing a tax return on March 31 with all it would entail, then prepare one on May 31 (which would include all the data through March 31 PLUS everything from April 1-May 31, then another on August 31 which would include everything from Jan. 1-August 31, then yet a final return through the entire year.   Your income fluctuates but don't you keep track of how much you had as of March 31?  How much by May 31 and how much by August 31?  And if self-employed how much you spent in each time period? 

I use Quickbooks for my business and can pull a report for each time period.  My Net Income for March 31 is almost 80% of the annual and at Aug. 31 about 95% of the annual because I do only income tax work.  However, my adjusted gross income is smoothed out by regular monthly SS checks and monthly interest income.  Then in October or so, I draw my RMD to withhold my SE tax for my SE income earlier in the year.  Like you, my income from SE fluctuates but other income is regular and some irregular.  However, with all my statements I can pretty easily determine my annualized income installments.

I hope this helps a bit.  Sometimes it is hard to see the forest for the trees.  If you want to just send some numbers, I would be happy to sort them as best I can.  They can be real or made up but with descriptions and dates so they go in the right bucket. 

Now try to enjoy today!

[Christian]

Thanks very much Margaret. I have prepared a spreadsheet of my own and fully understand adding income upward from time period to time period. To illustrate what I have been saying I will use a simple example. Let's say the the total income in column (a) is $20,000 and total deductions for the entire year are $10,000. In order to arrive at the adjusted gross income to report in box (a) I would deduct three months of deductions which would be 3 months divided by 12 which is 25%. I would then deduct $2,500 of the deductions for the initial time period of 1/1/20 - 3/31/20 to arrive at $7,500 as the adjusted gross income for that period. In box (b) we will say the  total income for that period is $15,000 arrived at by adding another two months of income to the $10,000 from box (a). The deductions for that period would be 5 months divided by 12 which would be 41.6%. I would then deduct $4,160 from the $15,000 to get $10,840 as the adjusted gross income for the period 1/1/20 - 5/31/20. You do not substract all the deductions of $10,000 in each time period is what I am getting at. You prorate the deductions for each period to deduct from the prorated gross income being reported for the period to arrive at the correct adjusted gross income for each time period. The instructions do not quite make this entirely clear the authors of the instructions I suppose assuming a reader would understand that this was to be done.

[Sara EA]

Maybe annualization works for those in highly seasonal businesses, but I have never had it work out for a client.  Even clients who took a huge distribution in say the third or forth quarter saw little benefit, especially at the state level.  Anyone else noticed this?  This is a lot of work, so the hour or two it takes can't be billed against the $10 savings.  I rarely do them anymore. 

[TexTaxToo]

Sara, the only point of annualization is to avoid penalties for underpayment of estimated tax.  If the cost of preparing the form is more than the penalty, you're right.

Christian, what deductions are you talking about?  As Margaret said, pretend that the period is a 'year' and you are preparing a return for that 'year'.  What deductions would you include?  If you are cash basis, only things that you actually paid during the period.  There might be a few things such as the sales tax deduction from the tables where prorating makes sense, but for most things, it is when they were paid.

 

 

[Christian]

I want to extend my thanks to you Tex and Sarah. I thought my figures were correct and you have answered the question I posed. Although I have been helping folks prepare their taxes for almost 40 years now I always come here to help me resolve any matters which I have little or no familiarity with. As the code is some several thousand pages I feel sure I will be back.  Like Sarah I doubt I will get much relief but I guess I can always request the one time waiver. 

[Max W]

On 9/13/2021 at 9:18 AM, Christian said:

I,,,,, ,,,, ,,,, but I guess I can always request the one time waiver. 

If you are referring o the first time penalty abatement, the estimated tax penalty is not subject to abatement.  

[Christian]

Oooooooooooooh ! Gee Max Sie hast meinen Tag gemacht.