What Is the 🐈Annualized Income Installment Method?

Taxpayers who are self-employed typically pay quarterly installments of their 澳洲幸运5官方开奖结果体彩网:estimated tax in four even amounts as figured by the regular installment metho🐼d.

When a taxpayer has a fluctuating income, however, it often causes them to underpay on one or more of the quarterly estimates🐟, leading to underpayment penalt🐷ies.

One solution is the 澳洲幸运5官方开奖结果体彩网:annualized income installment method. With this method, taxpayers may estimate their taxes based on known information from the beginning of the tax year through the end of the period paid.

Annualized Income Installment Method: Example

Consider, for example, taxpayers Jamila and Juan. Each of them owes $100,000 in annual estimated tax. Jamila pays her estimated payments in four $25,000 installments per the regular installment method. She evenly earned her income, 25% each quarteℱr, so the quarterly portions paid her estimated tax in full and on time. 

Juan's earnings were uneven, with each tax quarter at 0%, 20%, 30%, and 50%, respectively. Juan may have a difficult time coming up with the cash necessary to make his first and second quarter estimated tax payments when his earnings are low. Using the regular installment method, if Juan were to pay less estimated tax in the first two quarters and more in the second two quarters, he would owe an 澳洲幸运5官方开奖结果体彩网:underpayment penalty for the first two quarters.

The annualized income installment method allows Juan to refigure his installments, so they correlate to his income as he earns it. It does so by annualizing Juan’s installments over four overlapping periods. Each period begins on Jan. 1. The first period ends on March 31, the second ends on May 31, the third on Aug. 31, and the fourth period ends on Dec. 31. Each period includes all the previous ༒periods, with the final period encompassing the entire year. I꧃t allows Juan to estimate his tax payments based on his income to that point in the year.

In this example, we know the exact percentage of Juan's annual earnings from each tax quarter. Juan pays $0 in March, $20,000 in May, $30,000 in August, and $50,000 in December. Juan now has four installments of different amounts that, when added together, equal his full annual estimated tax of $100,000. Juan's refigured installments are now paid on time, his underpayment penalties abated.

The Bottom Line

The purpose of the regular installment method is to figure in quarterly tax installments. It divides the annual estimated tax into four equal segments. The resulting payments are appropriate for the 澳洲幸运5官方开奖结果体彩网:quarterly estimated taxes of taxpayers with a steady income, but this does not work as well for taxpayers whose income fluctuates. Some taxpayers may have a hard time finding t🅺he cash to pay estimated taxes💙 in slower months.

has forms, schedules, and worksheets that guide taxpayers desiring to refigure their installments using the annualized income installment method. However, figuring instal🔴lments this way is complicated an꧙d best done on an IRS worksheet by a tax professional.