Publication 505: Tax Withholding and Estimated Tax; Chapter 4

This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

What's New

Penalty rate. The penalty for underpayment of 2004 estimated tax is figured at an annual rate of 5% for the number of days the underpayment remained unpaid from April 15, 2004, through June 30, 2004; 4% from July 1, 2004, through September 30, 2004; and 5% from October 1, 2004, through April 15, 2005.

Reminders

Household employment taxes. When figuring the penalty for failure to pay estimated income tax, you generally must include with your estimated taxes any household employment taxes that you may have to pay.

Failure to pay estimated tax. You will not be liable for the penalty for failure to pay estimated income tax if the total tax shown on your return minus the amount you paid through withholding (including excess social security and railroad retirement tax withholding) is less than $1,000.

IRS will figure your penalty. You generally do not need to figure your underpayment penalty. In most cases, the IRS will figure it for you. You only need to figure your penalty in the following three situations.

You are requesting a waiver of part, but not all, of the penalty.
You are using the annualized income installment method to figure the penalty.
You are treating the federal income tax withheld from your wages as paid on the dates actually withheld.

Introduction

If you did not pay enough tax either through withholding or by making estimated tax payments, you will have an underpayment of estimated tax and you may have to pay a penalty.

Having completed copies of your latest federal income tax returns may help you through this chapter.

No penalty. Generally, you will not have to pay a penalty for 2004 if any of the following situations applies.

The total of your withholding and estimated tax payments was at least as much as your 2003 tax (or 110% of your 2003 tax if your adjusted gross income was more than $150,000, $75,000 if your 2004 filing status is married filing separately), and you paid all required estimated tax payments on time.
The tax balance due on your return is no more than 10% of your total 2004 tax, and you paid all required estimated tax payments on time.
Your total 2004 tax (defined later) minus your withholding is less than $1,000.
You did not have a tax liability for 2003.
You did not have any withholding taxes and your current year tax less any household employment taxes is less than $1,000.

Special rules apply if you are a farmer or fisherman.

IRS can figure the penalty for you. If you think you owe the penalty, but you do not want to figure it yourself when you file your tax return, you may not have to. Generally, the IRS will figure the penalty for you and send you a bill. However, you must complete Form 2210 or Form 2210-F and attach it to your return if you think you are able to lower or eliminate your penalty. See Form 2210, later.

Topics - This chapter discusses:

The general rule for the underpayment penalty,
Special rules for certain individuals,
Exceptions to the underpayment penalty,
How to figure your underpayment and the amount of your penalty on Form 2210, and
How to ask IRS to waive the penalty.

Useful Items - You may want to see:

Form (and Instructions)

2210
Underpayment of Estimated Tax by Individuals, Estates, and Trusts
2210-F
Underpayment of Estimated Tax by Farmers and Fishermen

See chapter 5 for information about getting these forms.

General Rule

In general, you may owe a penalty for 2004 if the total of your withholding and estimated tax payments did not equal at least the smaller of:

90% of your 2004 tax, or
100% of your 2003 tax. (Your 2003 tax return must cover a 12-month period.)

Your 2004 tax, for this purpose, is your Total tax for 2004, defined under Exceptions, later.

Special rules for certain individuals. There are special rules for farmers and fishermen, and for certain higher income taxpayers.

Farmers and fishermen. If at least two-thirds of your gross income for 2003 or 2004 is from farming or fishing, substitute 66⅔% for 90% in (1) above.

See Farmers and Fishermen, later.

Higher income taxpayers. If less than two-thirds of your gross income for 2003 and 2004 is from farming or fishing and your adjusted gross income (AGI) for 2003 was more than $150,000 ($75,000 if your filing status is married filing a separate return in 2004), substitute 110% for 100% in (2) above.

For 2003, AGI is the amount shown on Form 1040, line 34; Form 1040A, line 21; and Form 1040EZ, line 4.

Penalty figured for each period. Because the penalty is figured separately for each payment period, you may owe a penalty for a payment period even if you later paid enough to make up the underpayment. If you did not pay enough tax by the due date of any of the payment periods, you may owe a penalty even if you are due a refund when you file your income tax return.

Example 4.1.

You did not make estimated tax payments for 2004 because you thought you had enough tax withheld from your wages. Early in January 2005, you made an estimate of your total 2004 tax. Then you realized that your withholding was $2,000 less than the amount needed to avoid a penalty for underpayment of estimated tax.

On January 10, you made an estimated tax payment of $3,000, which is the difference between your withholding and your estimate of your total tax. Your final return shows your total tax to be $50 less than your estimate, so you are due a refund.

You do not owe a penalty for your payment due January 15, 2005. However, you may owe a penalty through January 10, 2005, (the day you made the $3,000 payment) for your underpayments for the earlier payment periods.

Minimum required each period. You will owe a penalty for any 2004 payment period for which your estimated tax payment plus your withholding for the period and overpayments for previous periods was less than the smaller of:

22.5% of your 2004 tax, or
25% of your 2003 tax. (Your 2003 tax return must cover a 12-month period.)

Note.

If you are subject to the rule for higher income taxpayers, discussed earlier, substitute 27.5% for 25% in (2) above.

When penalty is charged. If you miss a payment or you paid less than the minimum required in a period, you may be charged an underpayment penalty from the date the amount was due to the date the payment is made.

Trust payments of estimated tax. If you were a beneficiary of an estate or trust that credited its estimated tax payments to you, treat the amount credited (line 14a of Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, Etc.) as an estimated tax payment made by you on January 15, 2005.

Amended returns. If you file an amended return by the due date of your original return, use the tax shown on your amended return to figure your required estimated tax payments. If you file an amended return after the due date of the original return, use the tax shown on the original return.

However, if you and your spouse file a joint return after the due date to replace separate returns you originally filed by the due date, use the tax shown on the joint return to figure your required estimated tax payments. This rule applies only if both original separate returns were filed on time.

2003 separate returns and 2004 joint return. If you file a joint return with your spouse for 2004, but you filed separate returns for 2003, your 2003 tax is the total of the tax shown on your separate returns. You filed a separate return if you filed as single, head of household, or married filing separately.

2003 joint return and 2004 separate returns. If you file a separate return for 2004, but you filed a joint return with your spouse for 2003, your 2003 tax is your share of the tax on the joint return. You filed a separate return if you filed as single, head of household, or married filing separately.

To figure your share of the taxes on a joint return, first figure the tax both you and your spouse would have paid had you filed separate returns for 2003 using the same filing status as for 2004. Then multiply the tax on the joint return by the following fraction:

	The tax you would have paid had you filed a separate return
	The total tax you and your spouse would have paid had you filed separate returns

Example 4.2.

Lisa and Paul filed a joint return for 2003 showing taxable income of $49,000 and a tax of $6,654. Of the $49,000 taxable income, $41,000 was Lisa's and the rest was Paul's. For 2004, they file married filing separately. Lisa figures her share of the tax on the 2003 joint return as follows:

2003 Tax on $41,000 based on a separate return	$7,066
2003 Tax on $8,000 based on a separate return	854
Total	$ 7,920
Lisa's percentage of total ($7,066 ÷ $ 7,920)	89.22%
Lisa's part of tax on joint return ($6,654 × 89.22%)	$ 5,937

Form 2210. In most cases, you do not need to file Form 2210. The IRS will figure the penalty for you and send you a bill. If you want us to figure the penalty for you, leave the penalty line on your return blank. Do not file Form 2210.

If you want to figure your penalty, complete Part I, Part II, and either Part III or Part IV of Form 2210. See Reasons for filing to determine whether you should file Form 2210. If you use Form 2210, you cannot file Form 1040EZ.

On Form 1040, enter the amount of your penalty on line 75. If you owe tax on line 74, add the penalty to your tax due and show your total payment on line 74. If you are due a refund, subtract the penalty from the overpayment you show on line 71.

On Form 1040A, enter the amount of your penalty on line 48. If you owe tax on line 47, add the penalty to your tax due and show your total payment on line 47. If you are due a refund, subtract the penalty from the overpayment you show on line 44.

Lowering or eliminating the penalty. You may be able to lower or eliminate your penalty if you file Form 2210. You must file Form 2210 with your return if any of the following applies.

You request a waiver. See Waiver of Penalty, later.
You use the annualized income installment method. See the explanation of this method under Figuring Your Underpayment, later.
You use your actual withholding for each payment period for estimated tax purposes. See Actual withholding method under Figuring Your Underpayment, later.
You base any of your required installments on the tax shown on your 2003 return and you filed or are filing a joint return for either 2003 or 2004 but not for both years.

Exceptions

Generally, you do not have to pay an underpayment penalty if either of the following conditions apply:

Your total tax is less than $1,000, or
You had no tax liability last year.

Less Than $1,000 Due

You do not owe a penalty if the total tax shown on your return minus the amount you paid through withholding (including excess social security and railroad retirement tax withholding) is less than $1,000.

Total tax for 2004. For 2004, your total tax on Form 1040 is the amount on line 62 reduced by the total of the following amounts.

Any recapture of a federal mortgage subsidy from Form 8828 included on line 62.
Any social security or Medicare tax on tips not reported to your employer on line 58.
Any tax on excess contributions to IRAs, Archer MSAs, Coverdell education savings accounts, and health savings accounts, and any tax on excess accumulations in qualified retirement plans from Form 5329 included on line 59.
Any uncollected social security, Medicare, or railroad retirement tax included on line 62.
Any tax on golden parachute payments included on line 62.
Any excise tax on insider stock compensation from an expatriated corporation included on line 62.
Any earned income credit on line 65a.
Any additional child tax credit on line 67.
Any credit for federal tax on fuels from Form 4136 included on line 69.
Any health coverage tax credit from Form 8885 included on line 69.

Your total tax on Form 1040A is the amount on line 38 minus the amount on lines 41a and 42. Your total tax on Form 1040EZ is the amount on line 10 minus the amount on line 8a.

Paid through withholding. For 2004, the amount you paid through withholding on Form 1040 is the amount on line 63 plus any excess social security or railroad retirement tax withholding on line 66. On Form 1040A, the amount you paid through withholding is the amount on line 39. On Form 1040EZ, it is the amount on line 7.

No Tax Liability Last Year

You do not owe a penalty if you had no tax liability last year and you were a U.S. citizen or resident for the whole year. For this rule to apply, your tax year must have included all 12 months of the year.

You had no tax liability for 2003 if your total tax was zero or you did not need to file an income tax return.

Example 4.3.

Ray, who is single and 22 years old, was unemployed for most of 2003. He earned $2,700 in wages before he was laid off, and he received $2,500 in unemployment compensation afterwards. He had no other income. Even though he had gross income of $5,200, he did not have to pay income tax because his gross income was less than the filing requirement for a single person under age 65 ($7,800 for 2003). He filed a return only to have his withheld income tax refunded to him.

In 2004, Ray began regular work as an independent contractor. Ray made no estimated tax payments in 2004. Even though he did owe tax at the end of the year, Ray does not owe the underpayment penalty for 2004 because he had no tax liability in 2003.

Total tax for 2003. For 2003, your total tax on Form 1040 is the amount on line 60 reduced by the total of the following amounts.

Any recapture of a federal mortgage subsidy from Form 8828 included on line 60.
Any social security or Medicare tax on tips not reported to your employer on line 56.
Any tax on excess contributions to IRAs, Archer MSAs, and Coverdell education savings accounts, and any tax on excess accumulations in qualified retirement plans from Form 5329 included on line 57.
Any uncollected social security, Medicare, or railroad retirement tax included on line 60.
Any tax on golden parachute payments included on line 60.
Any earned income credit on line 63.
Any additional child tax credit on line 65.
Any credit for federal tax on fuels from Form 4136 included on line 67.
Any health coverage tax credit from Form 8885 included on line 67.

Your total tax on Form 1040A is the amount on line 38 minus the amount on lines 41 and 42. Your total tax on Form 1040EZ is the amount on line 10 minus the amount on line 8.

Figuring Your Required Annual Payment

Figure your required annual payment in Part I of Form 2210, following the line-by-line instructions. If you rounded the entries on your return to whole dollars, you can round on Form 2210.

Example 4.4.

The tax on Ivy Fields' 2003 return was $10,000. Her AGI was not more than $150,000. The tax on her 2004 return (Form 1040, line 43) is $11,000. She does not claim any credits or pay any other taxes.

For 2004, Ivy had $1,600 income tax withheld and paid $6,800 estimated tax. Her total payments were $8,400. 90% of her 2004 tax is $9,900. Because she paid less than her 2003 tax and less than 90% of her 2004 tax, and does not meet an exception, Ivy knows that she owes a penalty for underpayment of estimated tax. The IRS will figure the penalty for Ivy, but she decides to figure it herself on Form 2210 and pay it with her $2,600 tax balance when she files her tax return.

Ivy's required annual payment is $9,900 ($11,000 × 90%) because that is smaller than her 2003 tax.

Page 1 of Ivy's filled-in Form 2210 is shown at the end of this chapter. Her required annual payment of $9,900 is shown on line 9.

Different 2003 filing status. If you file a separate return for 2004, but you filed a joint return with your spouse for 2003, see 2003 joint return and 2004 separate returns, earlier, to figure the amount to enter as your 2003 tax on line 8 of Form 2210.

Short Method for Figuring the Penalty

You may be able to use the short method in Part III of Form 2210 to figure your penalty for underpayment of estimated tax. If you qualify to use this method, it will result in the same penalty amount as the regular method. However, either the annualized income installment method or the actual withholding method, explained later, may result in a lower penalty.

You can use the short method only if you meet one of the following requirements.

You made no estimated tax payments for 2004 (it does not matter whether you had income tax withholding), or
You paid estimated tax in four equal amounts on the due dates.

If you do not meet either requirement, figure your penalty using the regular method in Part IV, Form 2210.

Note.

If any payment was made before the due date, you can use the short method, but the penalty may be less if you use the regular method. If the payment was only a few days early, the difference is likely to be small.

You cannot use the short method if any of the following applies.

You made any estimated tax payments late.
You checked box C or D in Part II of Form 2210.
You are filing Form 1040NR or 1040NR-EZ and you did not receive wages as an employee subject to U.S. income tax withholding.

If you use the short method, you cannot use the annualized income installment method to figure your underpayment for each payment period. Also, you cannot use your actual withholding during each period to figure your payments for each period. These methods, which may give you a smaller penalty amount, are explained later under Figuring Your Underpayment.

Completing Part III. Complete Part III of Form 2210 following the line-by-line instructions.

First, figure your total underpayment for the year (line 14) by subtracting the total of your withholding and estimated tax payments (line 13) from your required annual payment (Part I, line 9). Then figure the penalty you would owe if the underpayment remained unpaid up to April 15, 2005. This amount (line 15) is the maximum estimated tax penalty on your underpayment.

Next, figure any part of the maximum penalty you do not owe (line 16) because your underpayment was paid before the due date of your return. For example, if you filed your 2004 return and paid the tax balance on April 3, 2005, you do not owe the penalty for the 12-day period from April 4 through April 15. Therefore, you would figure the amount to enter on line 16 using 12 days.

Finally, subtract from the maximum penalty amount (line 15) any part you do not owe (line 16). The result (line 17) is the penalty you owe. Enter that amount on line 75 of Form 1040 or line 48 of Form 1040A. Attach Form 2210 to your return only if you checked one of the boxes in Part II.

Example 4.5.

The facts are the same as in Example 4.4. Ivy paid her estimated tax payments in four installments of $1,700 ($6,800 ÷ 4) each on the dates they were due.

Ivy qualifies to use the short method to figure her estimated tax penalty. Using the annualized income installment method or actual withholding will not give her a smaller penalty amount because her income and withholding were distributed evenly throughout the year. Therefore, she figures her penalty in Part III of Form 2210 and leaves Part IV (not shown) blank.

Ivy figures her $1,500 total underpayment for the year (line 14) by subtracting the total of her withholding and estimated tax payments ($8,400) from her $9,900 required annual payment (Part I, line 9). The maximum penalty on her underpayment (line 15) is $48 ($1,500 × .03184).

Ivy plans to file her return and pay her $2,600 tax balance on March 16, 2005, 30 days before April 15. Therefore, she does not owe part of the maximum penalty amount. The part she does not owe (line 16) is figured as follows.

$1,500 × 30 × .00014 = $6

Ivy subtracts the $6 from the $48 maximum penalty and enters the result, $42, on line 17 and on line 75 of her Form 1040. She adds $42 to her $2,600 tax balance and enters the result, $2,642 on line 74 of her Form 1040. Ivy files her return on March 16 and attaches a check for $2,642. Because Ivy did not check any of the boxes in Part II, she does not attach Form 2210 to her tax return.

Ivy's filled-in Form 2210, Part III is shown at the end of this chapter.

Regular Method for Figuring the Penalty

You must use the regular method in Part IV of Form 2210 to figure your penalty for underpayment of estimated tax if any of the following apply to you.

You paid one or more estimated tax payments on a date other than the due date.
You paid at least one, but less than four, installments of estimated tax.
You paid estimated tax payments in unequal amounts.
You use the annualized income installment method to figure your underpayment for each payment period.
You use your actual withholding during each payment period to figure your payments.

If you use the regular method, figure your underpayment for each payment period in Section A, then figure your penalty for each payment period in Section B.

Figuring Your Underpayment (Section A of Part IV)

Figure your underpayment of estimated tax for each payment period in Section A following the line-by-line instructions. Complete each line for a payment period column before completing the next column.

Required installment. Your required payment for each payment period (line 18) is usually one-fourth of your required annual payment (Part I, line 9). However, if you are using the annualized income installment method (described later), first complete Schedule AI (Form 2210), and then enter the amounts from line 25 of that schedule on line 18 of Form 2210.

Payments. On line 19, enter in each column the total of:

Your estimated tax paid after the due date for the previous column and by the due date shown, and
One-fourth of your withholding.

For special rules for figuring your payments, see the instructions for Form 2210.

If you file Form 1040, your withholding is the amount on line 63, plus any excess social security or railroad retirement tax withholding on line 66. If you file Form 1040A, your withholding is the amount on line 39.

Actual withholding method. Instead of using one-fourth of your withholding for each quarter, you can choose to use the amounts actually withheld by each due date. You can make this choice separately for the tax withheld from your wages and for all other withholding.

Using your actual withholding may result in a smaller penalty if most of your withholding occurred early in the year.

If you use your actual withholding, you must check box D, Part II of Form 2210 and complete Form 2210 and file it with your return.

Regular Installment Method

Example 4.6.

Ben Brown's 2004 total tax (Form 1040, line 62) is $7,031, the total of his $4,685 income tax and $2,346 self-employment tax. His 2003 AGI was less than $150,000. He does not owe any other taxes or claim any credits other than for withholding. His 2003 tax was $6,116.

Ben's employer withheld $3,228 income tax during 2004. Ben paid no estimated tax for either the first or second period, but he paid $1,000 each on September 2, 2004, and January 12, 2005, for the third and fourth periods. Because the total of his withholding and estimated tax payments, $5,228 ($3,228 + $1,000 + $1,000), was less than 90% of his 2004 tax ($6,328), and was also less than his 2003 tax ($6,116), Ben knows he owes a penalty for underpayment of estimated tax. He decides to figure the penalty on Form 2210 and pay it with his $1,803 tax balance ($7,031 - $5,228) when he files his tax return on April 15, 2005.

Ben's required annual payment (Part I, line 9) is $6,116. Because his income and withholding were distributed evenly throughout the year, Ben enters one-fourth of his required annual payment, $1,529, in each column of line 18. On line 19, he enters one-fourth of his withholding, $807 in the first two columns and $1,807 ($807 plus $1,000 estimated tax payment) in the last two columns.

Ben has an underpayment (line 25) for each payment period even though his withholding and estimated tax payments for the third and fourth periods were more than his required installments (line 18). This is because the estimated tax payments made in the third and fourth periods are first applied to underpayments for the earlier periods. Page 1 and Section A of Part IV of Ben's Form 2210 are shown at the end of this chapter.

Annualized Income Installment Method (Schedule AI)

If you did not receive your income evenly throughout the year (for example, your income from a repair shop you operated was much larger in the summer than it was during the rest of the year), you may be able to lower or eliminate your penalty by figuring your underpayment using the annualized income installment method. Under this method, your required installment (line 18) for one or more payment periods may be less than one-fourth of your required annual payment.

To figure your underpayment using this method, complete Schedule AI of Form 2210. The schedule annualizes your tax at the end of each payment period based on your income, deductions, and other items relating to events that occurred since the beginning of the tax year through the end of the period.

If you use the annualized income installment method, you must check box C on Form 2210. You also must attach Form 2210 and Schedule AI to your return.

If you use Schedule AI for any payment due date, you must use it for all payment due dates.

Table 4–1. Calendar To Determine the Number of Days a Payment Is Late

Instructions. Use this table with Form 2210 if you are completing Part IV, Section B, or Schedule AI, Part IV, Section B. First, find the number for the payment due date by going across to the column of the month the payment was due and moving down the column to the due date. Then, in the same manner, find the number for the date the payment was made. Finally, subtract the due date number from the payment date number. The result is the number of days the payment is late.
Example. The payment due date is June 15 (61). The payment was made on November 4 (203). The payment is 142 days late (203–61).

Tax Year 2004
Day of	2004	2004	2004	2004	2004	2004	2004	2004	2004	2005	2005	2005	2005
Month	April	May	June	July	Aug.	Sept.	Oct.	Nov.	Dec.	Jan.	Feb.	Mar.	Apr.
1		16	47	77	108	139	169	200	230	261	292	320	351
2		17	48	78	109	140	170	201	231	262	293	321	352
3		18	49	79	110	141	171	202	232	263	294	322	353
4		19	50	80	111	142	172	203	233	264	295	323	354
5		20	51	81	112	143	173	204	234	265	296	324	355

6		21	52	82	113	144	174	205	235	266	297	325	356
7		22	53	83	114	145	175	206	236	267	298	326	357
8		23	54	84	115	146	176	207	237	268	299	327	358
9		24	55	85	116	147	177	208	238	269	300	328	359
10		25	56	86	117	148	178	209	239	270	301	329	360

11		26	57	87	118	149	179	210	240	271	302	330	361
12		27	58	88	119	150	180	211	241	272	303	331	362
13		28	59	89	120	151	181	212	242	273	304	332	363
14		29	60	90	121	152	182	213	243	274	305	333	364
15	0	30	61	91	122	153	183	214	244	275	306	334	365

16	1	31	62	92	123	154	184	215	245	276	307	335
17	2	32	63	93	124	155	185	216	246	277	308	336
18	3	33	64	94	125	156	186	217	247	278	309	337
19	4	34	65	95	126	157	187	218	248	279	310	338
20	5	35	66	96	127	158	188	219	249	280	311	339

21	6	36	67	97	128	159	189	220	250	281	312	340
22	7	37	68	98	129	160	190	221	251	282	313	341
23	8	38	69	99	130	161	191	222	252	283	314	342
24	9	39	70	100	131	162	192	223	253	284	315	343
25	10	40	71	101	132	163	193	224	254	285	316	344

26	11	41	72	102	133	164	194	225	255	286	317	345
27	12	42	73	103	134	165	195	226	256	287	318	346
28	13	43	74	104	135	166	196	227	257	288	319	347
29	14	44	75	105	136	167	197	228	258	289		348
30	15	45	76	106	137	168	198	229	259	290		349

31		46		107	138		199		260	291		350

Completing Schedule AI of Form 2210. Follow your Form 2210 instructions to complete Schedule AI. For each period shown on Schedule AI, figure your income and deductions based on your method of accounting. If you use the cash method of accounting (used by most people), include all income actually or constructively received during the period and all deductions actually paid during the period.

Note. Each period includes amounts from the previous period(s).

Period (a) includes items for January through March.
Period (b) includes items for January through May.
Period (c) includes items for January through August.
Period (d) includes items for the entire year.

Example 4.7. Betty Beige is in the same situation as Ben Brown in Example 4.6, except that her income tax is $3,741. Her required annual payment on Form 2210, Part I, line 9 is $5,478 (the lower of her $6,116 tax for 2003 or 90% of her $6,087 total tax for 2004). Betty did not receive her income evenly throughout the year. Therefore, she decides to figure her required installment for each period (line 18 of Form 2210) using the annualized income installment method.

Betty's filled-in Schedule AI and Section A of Part IV of Form 2210 using this method are shown at the end of this chapter.

Betty's wages during 2004 were $21,000 ($1,750 a month). Her net earnings from a business she started during the year were $16,600, received as follows:

April through May	$4,600
June through August	4,000
September through December	8,000

Before Betty can figure her adjusted gross income for each period (line 1 of Schedule AI), she must figure her deduction for self-employment tax for each period. She completes Part II of Schedule AI first. She figures the deduction for self-employment tax by dividing the amounts on line 34 by the annualization amounts for each period. The annualization amounts are 8 for the first period, 4.8 for the second period, 3 for the third period, and 2 for the fourth period.

Betty had $6,000 in itemized deductions for 2004. She divided them by period in the following manner.

1st period ($1,500). $250 a month withheld in state and local taxes, and $250 a month in mortgage interest X 3 months.
2nd period ($2,500). $250 a month withheld in state and local taxes and $250 a month in mortgage interest X 5 months.
3rd period ($4,000). $250 a month withheld in state and local taxes and $250 a month in mortgage interest X 8 months.
4th period ($6,000). $250 a month withheld in state and local taxes and $250 a month in mortgage interest X 12 months.

She enters each amount on line 4 in the proper column for that period.

Betty had no self-employment income for the first period, so she leaves the lines in that column blank. Her self-employment income was $4,600 for the second period, $8,600 ($4,600 + $4,000) for the third period, and $16,600 ($8,600 + $8,000) for the fourth period. She multiplies each amount by 92.35% (.9235) to find the amounts to enter on line 26. She then fills out the rest of Part II.

Betty figures the amounts to enter on line 1 of Schedule AI as follows:

1st Column—1/1/04 to 3/31/04:
$1,750 per month × 3 months		$5,250
2nd Column—1/1/04 to 5/31/04: $1,750 per month × 5 months		$8,750
Plus:	Self-employment income through 5/31/04	4,600
Less:	Self-employment tax deduction ($1,560 ÷ 4.8)	(325)
		$13,025
3rd Column—1/1/04 to 8/31/04: $1,750 per month × 8 months		$14,000
Plus:	Self-employment income through 8/31/04	8,600
Less:	Self-employment tax deduction ($1,822 ÷ 3)	(607)
		$21,993
4th Column—1/1/04 to 12/31/04:
$1,750 per month × 12 months		$21,000
Plus:	Self-employment income through 12/31/04	16,600
Less:	Self-employment tax deduction ($2,346 ÷ 2)	(1,173)
		$36,427

Betty completes the rest of Schedule AI to determine the amounts to put on Form 2210, line 18.

Betty then figures her underpayment in Part IV, Section A. She finds that she overpaid her estimated tax for the first and third payment periods, but she underpaid her estimated tax for the other two periods. Example 4.9 illustrates how Betty completes Part IV, Section B, of her Form 2210.

Figuring Your Penalty (Section B of Part IV)

Figure the amount of your penalty in Section B, Part IV of Form 2210, following the instructions. The penalty is imposed on each underpayment shown on line 25, Section A, for the number of days that it remained unpaid. (You may find it helpful to show the date of payment beside each amount on line 25.)

There are four rate periods to figure the penalty. Use Rate Period 1 (lines 27 and 28) to apply the 5% rate in effect between April 16, 2004, and June 30, 2004. Use Rate Period 2 (lines 29 and 30) to apply the 4% rate in effect between July 1, 2004, and September 30, 2004. Use Rate Period 3 (lines 31 and 32) to apply the 5% rate in effect between October 1, 2004, and December 31, 2004. Use Rate Period 4 (lines 33 and 34) to apply the 5% rate in effect between January 1, 2005, and April 15, 2005.

Aid for counting days. Table 4–1 provides a simple method to count the number of days between payment dates or between a due date and a payment date.

Find the number for the date the payment was due by going across to the column of the month the payment was due and moving down the column to the due date.
In the same manner, find the number for the date the payment was made.
Subtract the due date “number” from the payment date “number.”

For example, if a payment was due on June 15 (61), but was not paid until November 4 (203), the payment was 142 (203 - 61) days late.

Payments. Before completing Section B, make a list of the payments you made after the due date (or the last day payments could be made on time) for the earliest payment period an underpayment occurred. For example, if you had an underpayment for the first payment period, list your payments after April 15, 2004. You can use the tables in the Form 2210 instructions to make your list. Follow those instructions for listing income tax withheld and payments made with your return. Use the list to determine when each underpayment was paid.

Underpayment paid in two or more parts. If an underpayment was paid in two or more parts on different dates, you must figure the penalty separately for each part. (You may find it helpful to show the underpayment on line 25, Section A, broken down into the parts paid on different dates.)

Figuring the penalty. Form 2210 for 2004 has 4 rate periods. Figure the underpayment penalty by applying the appropriate rate against each underpayment shown on line 25. If an underpayment remained unpaid for more than one rate period, the penalty on that underpayment will be figured using more than one rate.

Use lines 27, 29, 31, and 33 to figure the number of days the underpayment remained unpaid. (Also see Table 4–1.) Use lines 28, 30, 32, and 34 to figure the actual penalty amount by applying the rate against the underpayment for the number of days it remained unpaid.

If an underpayment remained unpaid for the entire period, use Table 4–2 to determine the number of days to enter for each period.

<emphasis role="bold">Table 4–2</emphasis> Chart of Total Days

	Column (a)	Column (b)	Column (c)	Column (d)
line 27	76	15	NA	NA
line 29	92	92	15	NA
line 31	92	92	92	NA
line 33	105	105	105	90

Example 4.8. In Example 4.6, Ben Brown determined that he had an underpayment for all four payment periods.

Section B of Part IV of Form 2210 is shown at the end of this chapter.

Ben's 2004 tax is $7,031. His minimum required payment for each period is $1,529 ($6,116 ÷ 4). His $3,228 withholding is considered paid in four equal installments of $807, one on each payment due date. Therefore, he must make estimated tax payments of $722 each period. Ben made estimated tax payments of $1,000 on September 2, 2004, and $1,000 on January 12, 2005. He plans to file his return and pay his $1,803 tax balance ($7,031 tax – $5,228 withholding and estimated tax payments) on April 15, 2005. Therefore, he is considered to have made the following payments for tax year 2004.

	April 15, 2004	$ 807
	June 15, 2004	807
	September 2, 2004	1,000
	September 15, 2004	807
	January 12, 2005	1,000
	January 15, 2005	807
	April 15, 2005	1,803

Penalty for first period (April 15, 2004) – column (a). Ben's $722 underpayment for the first payment period was paid by applying $722 of his $807 payment on June 15, 2004. The $722 remained unpaid 61 days (April 16 through June 15, 2004). Ben enters “61” on line 27 and figures this part of the penalty on line 28.

Penalty for second period (June 15, 2004) – column (b). Ben figures his second period underpayment as follows.

Of the $807 he paid for the second period, $722 is applied to the underpayment remaining from the first period.
That leaves $85 ($807 – $722) to apply to his second period required installment of $1,529.
The result, $1,444 ($1,529 - $85) is Ben's underpayment for the second period.

The $1,444 underpayment is paid in two parts by applying the $1,000 paid on September 2 and $444 of his $807 September 15 payment. To help him figure his penalty, Ben shows each part of the underpayment paid on different dates on line 25.

For Rate Period 1, the entire underpayment remained unpaid 15 days (June 16 through June 30). Ben enters “15” on line 27 and figures this part of his penalty on line 28.

For Rate Period 2, $1,000 of the underpayment remained unpaid for 64 days (July 1 through September 2) and $444 remained unpaid for 77 days (July 1 through September 15). Ben enters “64” and “77” on line 29. He figures this part of the penalty on line 30 by adding the result of the two penalty computations.

Penalty for third period (September 15, 2004) – column (c). Ben figures his third period underpayment as follows.

Of the $1,807 he paid for the third period, $1,444 is applied to the underpayment remaining from the second period.
That leaves $363 ($1,807 - $1,444) to apply to his third period required installment of $1,529.
The result, $1,166 ($1,529 - $363) is Ben's underpayment for the third period.

The $1,166 underpayment is paid in two parts by applying his $1,000 payment on January 12, 2005, and $166 of his $807 payment on January 15. On line 25, Ben shows each part of the underpayment paid on different dates.

For Rate Period 2, the entire underpayment remained unpaid 15 days (September 16 through September 30). Ben enters “15” on line 29 and figures this part of his penalty on line 30.

For Rate Period 3, the entire underpayment remained unpaid 92 days (October 1 through December 31). Ben enters “92” on line 31 and figures this part of his penalty on line 32.

For Rate Period 4, $1,000 of the underpayment remained unpaid for 12 days (January 1 through January 12) and $166 remained unpaid for 15 days (January 1 through January 15). Ben enters “12” and “15” on line 33 and figures his penalty for each part of the underpayment on line 34. He includes all penalty amounts on line 34.

Penalty for fourth period (January 15, 2005) – column (d). Ben figures his fourth period underpayment as follows.

Of the $1,807 he paid for the fourth period, $1,166 is applied to the underpayment remaining from the third period.
That leaves $641 ($1,807 - $1,166) to apply to his fourth period required installment of $1,529.
The result, $888 ($1,529 - $641) is Ben's underpayment for the fourth period.

The $888 underpayment was paid April 15, 2005, with his tax return. The $888 remained unpaid 90 days (January 16 through April 15, 2005). Ben enters that number on line 33 and figures his penalty on line 34.

Total penalty. Ben's total penalty for 2004 on line 35 is $49.20, the total of all amounts on lines 28, 30, 32, and 34 in all columns. Ben enters that amount on line 75 of his Form 1040. He also adds $49 to his $1,803 tax balance and enters the $1,852 total on line 74. He files his return on April 15 and includes a check for $1,852. He keeps his completed Form 2210 for his records.

Example 4.9. In Example 4.7, Betty Beige's first underpayment was for the second payment period.

This example illustrates completion of Part IV, Section B, of Betty's Form 2210 under the annualized income installment method. Section B of Part IV of Form 2210 is shown at the end of this chapter.

Betty made the same payments listed in the table in Example 4.8 except that her final payment on April 15, 2005, was $859.

Penalty for second period – column (b). Betty's $424 underpayment for the second payment period was paid by applying $424 of her $1,000 September 2, 2004, payment. To help her figure her penalty, Betty shows the date the underpayment was paid on line 25.

For Rate Period 1, the entire underpayment remained unpaid for 15 days (June 16 through June 30). Betty enters “15” on line 27 and figures this part of her penalty on line 28.

For Rate Period 2, the entire underpayment remained unpaid for 64 days (July 1 through September 2). Betty enters “64” on line 29 and figures this part of her penalty on line 30.

Penalty for fourth period – column (d). Betty's $250 underpayment for the fourth payment period was paid on April 15, 2005, with her tax return. The entire amount remained unpaid 90 days (January 16 through April 15, 2005). Betty enters that number on line 33 and figures this part of her penalty on line 34.

Total penalty. Betty's total penalty for 2004 on line 35 is $6.92, the total of all amounts on lines 28, 30, 32, and 34 in all columns. Betty enters that amount on line 75 of her Form 1040. She also adds $7 to her $859 tax balance and enters the $866 total on line 74. She files her return on April 15 and includes a check for $866. Because she used the annualized income installment method, she must attach Form 2210, including Schedule AI, to her return and check box C of Form 2210.

Farmers and Fishermen

If you are a farmer or fisherman, the following special rules for underpayment of estimated tax apply to you.

The penalty for underpaying your 2004 estimated tax will not apply if you file your return and pay all the tax due by March 1, 2005. If you are a fiscal year taxpayer, the penalty will not apply if you file your return and pay the tax due by the first day of the third month after the end of your tax year.
Any penalty you owe for underpaying your 2004 estimated tax will be figured from one payment due date, January 15, 2005.
The underpayment penalty for 2004 is figured on the difference between the amount of 2004 withholding plus estimated tax paid by the due date and the smaller of:
1. 100% of the tax shown on your 2003 return, or
2. 66⅔% (rather than 90%) of your 2004 tax.

Even if these special rules apply to you, you will not owe the penalty if you meet either of the two conditions discussed earlier under Exceptions.

See chapter 2 to see whether you are a farmer or fisherman who is eligible for these special rules.

Form 2210-F. Use Form 2210-F to figure any underpayment penalty. Do not attach it to your return unless you check box 1a or box 1b. Also, if neither box applies to you and you owe a penalty, you do not need to complete Form 2210-F. The IRS can figure your penalty and send you a bill.

Waiver of Penalty

The IRS can waive the penalty for underpayment if either of the following applies.

You did not make a payment because of a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty.
You retired (after reaching age 62) or became disabled in 2003 or 2004 and both the following requirements are met.
1. You had a reasonable cause for not making the payment, and
2. Your underpayment was not due to willful neglect.

How to request a waiver. To request a waiver, you must complete Form 2210 as follows.

Check box A or B in Part II.
Complete line 1 through line 16 (or through line 34 if you use the regular method) without regard to the waiver.
Write the amount you want waived in parentheses on the dotted line next to line 17 (line 35 for the regular method).
Subtract this amount from the total penalty you figured without regard to the waiver. Enter the result on line 17 (line 35 for the regular method).
Attach Form 2210 and a statement to your return explaining the reasons you were unable to meet the estimated tax requirements and the time period for which you are requesting a waiver.
If you are requesting a penalty waiver due to a casualty, disaster, or other circumstance, include supporting documentation, such as police and insurance company reports.
If you are requesting a penalty waiver due to retirement or disability, attach documentation that shows your retirement date (and your age on that date) or the date you became disabled.

The IRS will review the information you provide and will decide whether or not to grant your request for a waiver.

Farmers and fishermen. To request a waiver, you must complete Form 2210-F as follows.

Check box 1a in Part I.
Complete line 2 through line 19 without regard to the waiver.
Write the amount you want waived in parentheses on the dotted line next to line 20.
Subtract this amount from the total penalty you figured without regard to the waiver. Enter the result on line 20.
Attach Form 2210-F and a statement to your return explaining the reasons you were unable to meet the estimated tax requirements.
If you are requesting a penalty waiver due to a casualty, disaster, or other circumstance, include supporting documentation, such as police and insurance company reports.
If you are requesting a penalty waiver due to retirement or disability, attach documentation that shows your retirement date (and your age on that date) or the date you became disabled.

The IRS will review the information you provide and will decide whether or not to grant your request for a waiver.

Form 2210 for Ivy Fields (Examples 4.4 and 4.5)Form: 2210 Filled-in examples

Form 2210, page 3 (Example 4.9)

Form 2210 for Ben Brown (Example 4.6)

Form 2210 for Ivy Fields (Examples 4.4 and 4.5)Form: 2210 Filled-in examples Page 2

Form 2210, page 3 (Example 4.7)Form: 2210 Filled-in examples

Form 2210, page 2 (Examples 4.7 and 4.9)Form: 2210 Filled-in examples

Form 2210, page 3 (Example 4.8)

Form 2210, page 3 (Example 4.9)

Chapter 4 - Underpayment Penalty for 2004