Annualized Income Installment Method - [PDF]

Annualized Income Installment Method

If you do not receive your income evenly throughout the year (for example, your income from a repair shop you operate is much larger in the summer than it is during the rest of the year), your required estimated tax payment for one or more periods may be less than the amount figured using the regular installment method.

The annualized income installment method annualizes your tax at the end of each period based on a reasonable estimate of your income, deductions, and other items relating to events that occurred from the beginning of the tax year through the end of the period. To see whether you can pay less for any period, complete the 2012 Annualized Estimated Tax Worksheet (Worksheet 2-6).

You first must complete the 2012 Estimated Tax Worksheet through line 16b.

Use the result you figure on line 32 of the 2012 Annualized Estimated Tax Worksheet to make your estimated tax payments and complete your payment vouchers.

See Example 2 - Annualized Income Installment Method , later to see how the worksheet is completed.


If you use the annualized income installment method to figure your estimated tax payments, you must file Form 2210 with your 2012 tax return. See Annualized Income Installment Method (Schedule AI) in chapter 4 for more information.

Instructions for the 2012 Annualized Estimated Tax Worksheet (Worksheet 2-6)

Use Figure 2-C to help you follow these instructions. See Worksheet 2-6 for another worksheet available for your use.

The purpose of this worksheet is to determine your estimated tax liability as your income accumulates throughout the year, rather than dividing your entire year's estimated tax liability by four as if your income was earned equally throughout the year. The top of the worksheet shows the dates for each payment period. The periods build; that is, each period includes all previous periods. After the end of each payment period, complete the corresponding worksheet column to figure the payment due for that period.

Line 1. Enter your AGI for the period. This is your gross income for the period, including your share of partnership or S corporation income or loss, minus your adjustments to income for that period. See Expected AGI—Line 1 , earlier.

2010 rollovers or conversions to Roth IRA or account. If you elected to report half the income in 2011 and half in 2012, treat that income as received in an equal amount for each quarter.

Self-employment income. If you had self-employment income, first complete Section B of this worksheet. Use the amounts on line 46 when figuring your expected AGI to enter in each column of Section A, line 1.

Line 4. Be sure to consider all deduction limits figured on Schedule A (Form 1040), such as reducing your medical expenses by 7.5% of your AGI, or reducing certain miscellaneous deductions by 2% of your AGI. Figure your deduction limits using your expected AGI in the corresponding column of line 1 (2012 Annualized Estimated Tax Worksheet (Worksheet 2-6)).

Line 6. Multiply line 4 by line 5 and enter the result on line 6.

Line 7. If you will not itemize your deductions, use Worksheet 2-3 to figure your standard deduction.

Line 10. Multiply $3,800 by your total expected exemptions and enter the result on line 10.

Line 12. Generally, you will use the 2012 Tax Rate Schedules or in the instructions to Form 1040-ES to figure the tax on your annualized income. However, see below for situations where you must use a different method to compute your estimated tax.

Tax on child's investment income. You must use a special method to figure tax on the income of the following children who have more than $1,900 of investment income.
  1. Children under age 18 at the end of 2012.

  2. The following children if their earned income is not more than half their support.

    1. Children age 18 at the end of 2012.

    2. Children who are full-time students over age 18 and under age 24 at the end of 2012.

See Publication 929.

Tax on net capital gain. The regular income tax rates for individuals do not apply to a net capital gain. Instead, your net capital gain is taxed at a lower maximum rate.

The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss.

Tax on qualified dividends. Generally, the maximum tax rate for qualified dividends is 15% (0% for people whose other income is taxed at the 10% or 15% rate).

Tax on capital gain or qualified dividends. If the amount on line 1 includes a net capital gain or qualified dividends, use Worksheet 2-7 to figure the amount to enter on line 12.

Tax if excluding foreign earned income or excluding or deducting foreign housing. If you expect to claim the foreign earned income exclusion or the housing exclusion or deduction on Form 2555 or Form 2555-EZ, use Worksheet 2-8 to figure the amount to enter on line 12.

Line 13. If you file Form 1040, add the tax from Forms 8814, 4972, and 6251 for the period. If you file Form 1040A, add the amount from the Alternative Minimum Tax Worksheet found in the instructions. Also include any recapture of an education credit for each period. You may owe this tax if you claimed an education credit in an earlier year and you received either tax-free educational assistance or a refund of qualifying expenses for the same student after filing your 2011 return.

Use the 2011 forms or worksheets to see if you will owe any of the taxes discussed above. Figure the tax based on your income and deductions during the period shown in the column headings. Multiply this amount by the annualization amounts shown for each column on line 2 of the 2012 Annualized Estimated Tax Worksheet (Worksheet 2-6). Enter the result on line 13 of this worksheet.

Line 15. Include all the nonrefundable credits you expect to claim because of events that will occur during the period. If you are using your 2011 return as a guide and filed Form 1040, your 2011 credits were entered on lines 47 through 53. If you filed Form 1040A, your credits were on lines 29 through 33.


When figuring your credits for each period, annualize any item of income or deduction to figure each credit. For example, if you need to use your AGI to figure a credit, use line 3 of Worksheet 2-6 to figure the credit for each column.

Line 17. Enter your self-employment tax for the period from Section B, line 41.

Line 18. Add your expected other taxes.

Other taxes include the following.

  1. Additional tax on early distributions from:

    1. An IRA or other qualified retirement plan,

    2. A tax-sheltered annuity, or

    3. A modified endowment contract entered into after June 20, 1988.

  2. Household employment taxes if:

    1. You will have federal income tax withheld from wages, pensions, annuities, gambling winnings, or other income, or

    2. You would be required to make estimated tax payments even if you did not include household employment taxes when figuring your estimated tax.

  3. Amounts on Form 1040 written in on the line for “other taxes” (line 60 on the 2011 Form 1040). But do not include recapture of a federal mortgage subsidy; tax on excess golden parachute payments; look-back interest due under section 167(g) or 460(b) of the Internal Revenue Code; excise tax on insider stock compensation from an expatriated corporation; uncollected social security, Medicare, or RRTA tax on tips or group-term life insurance; or additional tax on advance payments of health coverage tax credit when not eligible.

  4. Repayment of the first-time homebuyer credit if the home will cease to be your main home in 2012. See Form 5405 for exceptions.

Line 20. Include all the refundable credits (other than withholding credits) you can claim because of events that occurred during the period. If you are using your 2011 return as a guide and filed Form 1040, include the credits on lines 64a, 65, 66, 70, and 71 (boxes c and d). If you filed Form 1040A, include the credits on lines 38a, 39, and 40. If you filed Form 1040EZ, include line 8a.


When figuring your refundable credits for each period, annualize any item of income or deduction used to figure each credit.

Line 29. If line 28 is smaller than line 25 and you are not certain of the estimate of your 2012 tax, you can avoid a penalty by entering the amount from line 25 on line 29.

Line 31. For each period, include estimated tax payments made and any excess social security and railroad retirement tax.

Also include estimated federal income tax withholding. One-fourth of your estimated withholding is considered withheld on the due date of each payment period. To figure the amount to include on line 31 for each period, multiply your total expected withholding for 2012 by:

  • 25% (.25) for the first period,

  • 50% (.50) for the second period,

  • 75% (.75) for the third period, and

  • 100% (1.00) for the fourth period.

However, you may choose to include your withholding according to the actual dates on which the amounts will be withheld. For each period, include withholding made from the beginning of the period up to and including the payment due date. You can make this choice separately for the taxes withheld from your wages and all other withholding. For an explanation of what to include in withholding, see Total Estimated Tax Payments Needed—Line 16a , earlier.

Nonresident aliens. If you will file Form 1040NR and you do not receive wages as an employee subject to U.S. income tax withholding, the instructions for the worksheet are modified as follows.
  1. Skip column (a).

  2. On line 1, enter your income for the period that is effectively connected with a U.S. trade or business.

  3. On line 21, increase your entry by the amount determined by multiplying your income for the period that is not effectively connected with a U.S. trade or business by the following.

    1. 72% for column (b).

    2. 45% for column (c).

    3. 30% for column (d).

    However, if you can use a treaty rate lower than 30%, use the percentages determined by multiplying your treaty rate by 2.4, 1.5, and 1, respectively.

  4. On line 26, enter one-half of the amount from line 16c of the Form 1040-ES (NR) 2012 Estimated Tax Worksheet in column (b), and one-fourth in columns (c) and (d).

  5. On lines 24 and 27, skip column (b).

  6. On line 31, if you do not use the actual withholding method, include one-half of your total expected withholding in column (b) and one-fourth in columns (c) and (d).

See Publication 519 for more information.