Q about annualizing income

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Topic Author
SpideyIndexer
Posts: 633
Joined: Thu Apr 02, 2015 10:13 pm

Q about annualizing income

Post by SpideyIndexer »

In 2021 I had a large taxable event in Q4, moderate taxable income in Q1, and small dividends and interest throughout the year. Is it allowable to lump the small dividends into Q1? Less paperwork for me at the expense of a few bucks additional penalty and interest for late estimated tax payments.

Or does the IRS not want this to be over-pessimistic for me but rather 100% correct?
Topic Author
SpideyIndexer
Posts: 633
Joined: Thu Apr 02, 2015 10:13 pm

Re: Q about annualizing income

Post by SpideyIndexer »

I'm digging into reporting annualized income on TT on a WIP return. It is not quite as bad as I feared since I didn't have many security sales last year and all of the cap gain distributions were in Q4. The biggest headaches are separating qualified dividends for total and annualizing the foreign tax credit. Every firm does not report in as much detail by quarter as Vanguard.

Still, I'm not sure whether the accuracy need be "all or nothing." In other words, can some of the separation by quarters be either estimated or pessimistic? (By pessimistic I mean for example lumping some of my income into Q1 or the credit into Q4, which is bad for me but good for the IRS.)
secondcor521
Posts: 394
Joined: Wed Sep 10, 2014 4:11 pm

Re: Q about annualizing income

Post by secondcor521 »

No. The IRS expects you to follow their instructions completely and accurately. Sometimes this is difficult to do.

But you can let the IRS figure the underpayment penalty for you by leaving Line 38 blank. It may be worth it to avoid trying to get everything done properly on the annualized method.

You may also qualify for a safe harbor. There are several.

You can also just request a waiver of the penalty. This would require filling out part of Form 2210 but not the complicated part you're trying to do.
MarkNYC
Posts: 2296
Joined: Mon May 05, 2008 7:58 pm

Re: Q about annualizing income

Post by MarkNYC »

Depending on the nature of the tax return, accurate preparation of the annualized income (AI) section of Form 2210 can be difficult, and some amounts subject to debate. For example, if there is a Schedule C with an associated SEP deduction, but the SEP contribution was not made until March of the following year, how should the SEP deduction be allocated? Either (1) all 4th period, (2) ratably over the 4 periods, (3) based on net business income for each period, or (4) all 1st period if net business income for that period was large enough to support the full contribution? I don't know the right answer. There are other confusing situations.

The point is this. I've seen numerous AI schedules over the years, many of which listed some amounts that were either wrong or questionable. Yet I have never seen or heard of the IRS ever questioning any amount on Schedule AI of Form 2210. My impression has always been that they do not look at it. Keep in mind we're not talking about calculation of tax, but calculation of a penalty.

That said, taxpayers should do their best to prepare the form accurately.
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