Illustrated Examples

The following examples show how to figure estimated tax payments under the regular installment method and under the annualized income installment method.

Example 2.9: Regular Installment Method

Early in 2001, Anne and Larry Jones figure their estimated tax payments for the year. They expect to receive the following income during 2001:

They also use the following expected items to figure their estimated tax:

The Joneses plan to file a joint return. They use the 2001 Estimated Tax Worksheet included in Form 1040-ES to figure their estimated tax payments. Their filled-in worksheet follows this discussion.

Expected adjusted gross income. Anne can claim an income tax deduction for one-half of her self-employment tax as a business expense. So before the Joneses figure their expected adjusted gross income, they figure Anne's expected self-employment tax, as follows:

The Joneses enter $35,555 on the dotted line and $5,440 in the blank on line 11 of the worksheet. They subtract one-half of that amount, $2,720, and their $1,000 adjustment for IRA contributions from their $77,016 total income to find their expected adjusted gross income, $73,296. They enter that amount on line 1 of the worksheet.

Expected taxable income. The Joneses find their standard deduction, $7,600, in the 2001 Standard Deduction Tables. This is smaller than their expected itemized deductions, so they enter $8,300 on line 2 of the worksheet. They subtract the amount on line 2 from the amount on line 1 and enter the result, $64,996, on line 3. They enter their deduction for exemptions, $5,800, on line 4. After subtracting this amount, their expected taxable income on line 5 is $59,196.

Expected taxes and credits. The Joneses use the 2001 Tax Rate Schedule Y-1 at the end of this chapter to figure their expected income tax, and enter $10,699 on line 6 of the worksheet. They do not expect to owe any other taxes that would be entered on lines 7 or 12, or have any credits that would be entered on lines 9 or 13b, so they leave those lines blank.

The Joneses' total expected tax on line 13c, after adding Anne's self-employment tax, is $16,139.

Estimated tax. The Joneses multiply their total expected tax by 90% and enter $14,525 on line 14a of the worksheet. They enter their 2000 tax on line 14b. Their required annual payment on line 14c is the smaller amount, $14,525.

They enter Larry's expected withholding, $5,795, on line 15 and subtract it from their required annual payment. Their estimated tax on line 16 is $8,730.

Required estimated tax payment. The Joneses' first estimated tax payment is due April 16, 2001. They enter one-fourth of their estimated tax, $2,183, on line 17 of the worksheet and on their Form 1040-ES payment-voucher due April 15. They mail the voucher with their payment to the address shown for their area in the Form 1040-ES instructions, and record the payment on the Record of Estimated Tax Payments in the instructions.

If their estimated tax does not change during the year, the Joneses also will pay $2,183 estimated tax by June 15 and September 17, 2001, and January 15, 2002.

Example 2.10: Annualized Income Installment Method

The facts are the same as in Example 2.9, except that the Joneses do not expect to receive their income evenly throughout the year. Anne expects to receive the largest portion of her self-employment income during the last few months of the year, and the Joneses' rental income is from a vacation home rented only in the summer months.

After completing their 2001 Estimated Tax Worksheet, the Joneses decide to use the annualized income installment method to see if they can pay less than $2,183 estimated tax for one or more payment periods. They complete the 2001 Annualized Estimated Tax Worksheet (Worksheet 2.10) in this chapter. Their filled-in worksheet follows their filled-in 2001 Estimated Tax Worksheet at the end of this discussion.

First Period

On April 1, 2001, the Joneses complete the first column of the worksheet for the period January 1 through March 31. They had the following income for the period:

They also take into account the following items for the period:

Annualized adjusted gross income. Before the Joneses figure their adjusted gross income for the period, they first figure Anne's self-employment tax in Section B, and then her adjustment to income for self-employment tax.

On line 27 of Section B, they enter $2,771, which is Anne's net profit from self-employment for the period, $3,000, multiplied by .9235. The prorated social security tax limit is preprinted on line 28. She has no social security wages, so they enter zero on line 29, and $20,100 on line 30. Anne's annualized social security tax on line 32 is $1,374, ($2,771 x .496). Her annualized medicare tax on line 34 is $321 ($2,771 x .116). Her total annualized self-employment tax on line 35a is $1,695. They enter that amount on line 13 of Section A.

The Joneses figure their adjustment to income for Anne's self-employment tax on lines 35b and 35c. They figure the amount to be $212 ($1,695 x 8). They subtract that amount and their $150 IRA contributions from their $11,462 total income and enter their adjusted gross income for the period, $11,100, on line 1 of Section A. They multiply that amount by 4 and enter their annualized adjusted gross income, $44,400, on line 3.

Annualized taxable income. The Joneses figure their annualized itemized deductions ($1,200 x 4) on lines 4 through 6 of Section A. Because the result is smaller than their standard deduction, they enter their $7,600 standard deduction on line 8. After subtracting that amount and their $5,800 deduction for exemptions, the Joneses' annualized taxable income on line 11 is $31,000.

Annualized taxes and credits. The Joneses use the 2001 Tax Rate Schedule Y-1 at the end of this chapter to figure their annualized income tax, $4,650, on line 12 of Section A.

The Joneses have no other taxes or credits for the period that would be entered on lines 14 or 16, so they leave those lines blank and enter $6,345 ($4,650 + $1,695) on lines 15 and 17. This is their annualized total tax.

Required estimated tax payment. The Joneses' annualized income installment on line 21 of Section A is $1,428 ($6,345 x 22.5%). On lines 22 and 24 they enter $3,631, one-fourth of their $14,525 required annual payment under the regular installment method of figuring estimated tax payments (from line 14c of the 2001 Estimated Tax Worksheet). Because $1,428 is smaller, they enter the $2,203 difference on line 25 and then enter $1,428 on lines 26a and 26b.

Larry's total expected withholding for the year is $5,795. The Joneses can treat one-fourth of that amount, $1,449, as paid on April 16, or they can choose to use Larry's actual withholding for the period, $1,350. Because they want to make their required estimated tax payment as small as possible, the Joneses enter $1,449 on line 26c.

On line 26d, the Joneses' required estimated tax payment for the period under the annualized income installment method is $0 ($1,428 - $1,449). They do not have a Form 1040-ES payment-voucher due April 16, 2001.

Second, Third, and Fourth Periods

After the end of each remaining payment period, the Joneses complete the column of the worksheet for that period (from the beginning of the year through the end of that payment period) in the same way they did for the first period. They had the following income for each period:

They also take into account the following items for each period:

For the second period, as for the first, the annualized income installment method allows the Joneses to pay less than their required payment under the regular installment method of figuring estimated tax payments. They make up the difference in the third and fourth periods when their income is higher.

Because the Joneses are using the annualized income installment method, they will file Form 2210 with their tax return for 2001.

Filled-in Worksheet for Example 2.9

Filled-in Annualized Estimated Tax Worksheets

Filled-in Annualized Estimated Tax Worksheets and 2001 Tax Rate Schedules

Standard Deduction Tables

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