The following examples show how to figure estimated tax payments under the regular installment method and under the annualized income installment method.
Early in 2005, Anne and Larry Jones figure their estimated tax payments for the year. They expect to receive the following income during 2005:
| Larry's salary | $34,200 |
| Unemployment compensation | 600 |
| Anne's net profit from self-employment | 38,500 |
| Net rental income | 2,671 |
| Interest income | 2,300 |
| Dividends | 3,745 |
| Total | $82,016 |
They also use the following expected items to figure their estimated tax:
| Adjustment to income for IRA contributions | $ 1,000 |
| Itemized deductions | 10,200 |
| Deduction for exemptions ($3,200 × 2) | 6,400 |
| 2004 total tax | 15,220 |
| Withholding | 5,792 |
The Joneses plan to file a joint return. They use the 2005 Estimated Tax Worksheet included in Form 1040-ES to figure their estimated tax payments. Their filled-in worksheet follows this discussion.
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:
Filled-In Worksheet 2.2 for Anne Jones (Example 2.9) | 1. | Enter your expected income and profits subject to self-employment tax | $38,500 |
| 2. | Multiply line 1 by .9235 | $35,555 |
| 3. | Multiply line 2 by .029 | $1,031 |
| 4. | Social security tax maximum income | $90,000 |
| 5. | Enter your expected wages (if subject to social security tax) | -0- |
| 6. | Subtract line 5 from line 4 | $90,000 |
| Note. If line 6 is zero or less, enter -0-on line 8 and skip to line 9. |
| 7. | Enter the smaller of line 2 or line 6 | $35,555 |
| 8. | Multiply line 7 by .124 | $4,409 |
| 9. | Add line 3 and line 8. Enter the result here and on line 11 of your 2005 Estimated Tax Worksheet | $5,440 |
| 10. | Multiply line 9 by .50. This is your deduction for one-half of your self-employment tax | $2,720 |
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 $82,016 total income to find their expected adjusted gross income, $78,296. They enter that amount on line 1 of the worksheet.
The Joneses find their standard deduction, $10,000, in the 2005 Standard Deduction Tables. This is smaller than their expected itemized deductions, so they enter $10,200 on line 2 of the worksheet. They subtract the amount on line 2 from the amount on line 1 and enter the result, $68,096, on line 3. They enter their deduction for exemptions, $6,400, on line 4. After subtracting this amount, their expected taxable income on line 5 is $61,696.
The Joneses use the 2005 Tax Rate Schedule Y-1 at the end of this chapter to figure their expected income tax, and enter $8,754 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 $14,194.
The Joneses multiply their total expected tax by 90% and enter $12,775 on line 14a of the worksheet. They enter their 2004 tax on line 14b. Their required annual payment on line 14c is the smaller amount, $12,775.
They enter Larry's expected withholding, $5,792, on line 15 and subtract it from their required annual payment. Their estimated tax on line 16 is $6,983.
The Joneses' first estimated tax payment is due April 15, 2005. They enter one-fourth of their estimated tax, $1,746, 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 $1,746 estimated tax by June 15, September 15, 2005, and January 17, 2006.
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 2005 Estimated Tax Worksheet, the Joneses decide to use the annualized income installment method to see if they can pay less than $1,746 estimated tax for one or more payment periods. They complete the 2005 Annualized Estimated Tax Worksheet (Worksheet 2.10) in this chapter. Their filled-in worksheet follows their filled-in 2005 Estimated Tax Worksheet at the end of this example.
On April 1, 2005, 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:
| Larry's salary | $8,550 |
| Unemployment compensation | 600 |
| Anne's net profit from self-employment | 3,000 |
| Net rental income | -0- |
| Interest income | 500 |
| Dividends | 462 |
| Total | $13,112 |
They also take into account the following items for the period:
| Adjustment to income for IRA contributions | $ 150 |
| Itemized deductions | 1,200 |
| Withholding | 1,350 |
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 29 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 30. She has no social security wages, so they enter zero on line 31, and $22,500 on line 32. Anne's annualized social security tax on line 34 is $1,374, ($2,771 × .496). Her annualized Medicare tax on line 36 is $321 ($2,771 × .116). Her total annualized self-employment tax on line 37 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 38 and 39. They figure the amount to be $212 ($1,695 ÷ 8). They subtract that amount and their $150 IRA contributions from their $13,112 total income and enter their adjusted gross income for the period, $12,750, on line 1 of Section A. They multiply that amount by 4 and enter their annualized adjusted gross income, $51,000, on line 3.
The Joneses figure their annualized itemized deductions ($1,200 × 4) on lines 4 through 6 of Section A. Because the result is smaller than their standard deduction, they enter their $10,000 standard deduction on line 8. After subtracting that amount and their $6,400 deduction for exemptions, the Joneses' annualized taxable income on line 11 is $34,600.
The Joneses use the 2005 Tax Rate Schedule Y-1 at the end of this chapter to figure their annualized income tax, $4,460, 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 $6,155 ($4,460 + $1,695) on lines 15 and 17. This is their annualized total tax.
The Joneses' annualized income installment on line 21 of Section A is $1,385 ($6,155 × 22.5%). On lines 22 and 24 they enter $3,194, one-fourth of their $12,775 required annual payment under the regular installment method of figuring estimated tax payments (from line 14c of the 2005 Estimated Tax Worksheet). Because $1,385 is smaller, they enter that amount on lines 25 and 26.
Larry's total expected withholding for the year is $5,792. The Joneses can treat one-fourth of that amount, $1,448, as paid on April 15, or they can choose to use Larry's actual withholding for the period, $1,350. The Joneses enter $1,448 on line 27.
On line 28, the Joneses' required estimated tax payment for the period under the annualized income installment method is $0 ($1,385 - $1,448 is less than zero). They do not have a Form 1040-ES payment voucher due April 15, 2005.
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:
| | Second Jan. 1- May 31 | Third Jan. 1- Aug. 31 | Fourth Jan. 1- Dec. 31 |
| Larry's salary | $17,100 | $25,650 | $34,200 |
| Unemployment compensation | 600 | 600 | 600 |
| Anne's net profit from self-employment | 6,000 | 15,850 | 38,500 |
| Net rental income | 668 | 2,671 | 2,671 |
| Interest income | 850 | 1,450 | 2,300 |
| Dividends | 674 | 1,708 | 3,745 |
| Total | $25,892 | $47,929 | $82,016 |
They also take into account the following items for each period:
| | Second Jan. 1- May 31 | Third Jan. 1- Aug. 31 | Fourth Jan. 1- Dec. 31 |
| Adjustment to income for IRA contributions | $ 250 | $ 400 | $1,000 |
| Itemized deductions | 2,700 | 6,400 | 10,200 |
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 2005.
Taxmap/pubs/p505-016.htm#TXMP04033899
Filled-in Worksheet for Example 2.9 Taxmap/pubs/p505-016.htm#w15008e09
Filled-In 2005 Annualized Estimated Tax Worksheet for Example 2.10 | Section A (For Figuring Your Annualized Estimated Tax Payments) - Complete each column after end of period shown. | | Estates and trusts: Use the following ending dates in each column - 2/29, 4/30, 7/31, 11/30. | 1/1/05 to 3/31/05 | 1/1/05 to 5/31/05 | 1/1/05 to 8/31/05 | 1/1/05 to 12/31/05 | | 1 | Adjusted gross income for each period. (Caution: See instructions.) Self-employed: Complete Section B first. | 1 | 12,750 | 25,218 | 46,409 | 78,296 | | 2 | Annualization amounts. | 2 | 4 | 2.4 | 1.5 | 1 | | 3 | Annualized income. Multiply line 1 by line 2. | 3 | 51,000 | 60,523 | 69,614 | 78,296 | | 4 | Itemized deductions for period. If you do not expect to itemize, skip to line 7 and enter zero. | 4 | 1,200 | 2,700 | 6,400 | 10,200 | | 5 | Annualization amounts. | 5 | 4 | 2.4 | 1.5 | 1 | | 6 | Multiply line 4 by line 5. (Caution: See instructions and Worksheet 2.7.) | 6 | 4,800 | 6,480 | 9,600 | 10,200 | | 7 | Standard deduction from 2005 tables. | 7 | 10,000 | 10,000 | 10,000 | 10,000 | | 8 | Enter the larger of line 6 or line 7. | 8 | 10,000 | 10,000 | 10,000 | 10,200 | | 9 | Subtract line 8 from line 3. | 9 | 41,000 | 50,523 | 59,614 | 68,096 | | 10 | Multiply $3,200 by your total expected exemptions. (Caution: See instructions and Worksheet 2.8.) | 10 | 6,400 | 6,400 | 6,400 | 6,400 | | 11 | Subtract line 10 from line 9. | 11 | 34,600 | 44,123 | 53,214 | 61,696 | | 12 | Tax on the amount on line 11 from the 2005 Tax Rate Schedules. (Caution: See instructions and Worksheet 2.9.) | 12 | 4,460 | 5,888 | 7,252 | 8,754 | | 13 | Self-employment tax from line 37 of Section B. | 13 | 1,695 | 2,035 | 3,359 | 5,440 | | 14 | Other taxes for each payment period. | 14 | | | | | | 15 | Add lines 12, 13, and 14. | 15 | 6,155 | 7,923 | 10,611 | 14,194 | | 16 | Credits for each period. | 16 | | | | | | 17 | Total tax. Subtract line 16 from line 15. (If less than zero, enter zero.) | 17 | 6,155 | 7,923 | 10,611 | 14,194 | | 18 | Applicable percentage. | 18 | 22.5% | 45% | 67.5% | 90% | | 19 | Multiply line 17 by line 18. | 19 | 1,385 | 3,565 | 7,162 | 12,775 | | 20 | Add amounts on line 25 of all preceding columns. | 20 | | 1,385 | 3,565 | 7,162 | | 21 | Annualized income installment. Subtract line 20 from line 19. (If less than zero, enter zero.) | 21 | 1,385 | 2,180 | 3,597 | 5,613 | | 22 | Divide line 14c of the Form 1040-ES Estimated Tax Worksheet by 4. | 22 | 3,194 | 3,194 | 3,194 | 3,194 | | 23 | Subtract line 25 of preceding column from line 24 of preceding column. | 23 | | 1,809 | 2,823 | 2,420 | | 24 | Add lines 22 and 23. | 24 | 3,194 | 5,003 | 6,017 | 5,614 | | 25 | Enter the smaller of line 21 or line 24. (Caution: See instructions.) | 25 | 1,385 | 2,180 | 3,597 | 5,613 | | 26 | Total required payments for the period. Add lines 20 and 25. | 26 | 1,385 | 3,565 | 7,162 | 12,775 | | 27 | Estimated tax payments made and tax withholding through the due date for the period. | 27 | 1,448 | 2,896 | 5,013 | 8,610 | | 28 | Estimated tax payment required by the next due date. Subtract line 27 from line 26 and enter the result (but not less than zero) here and on your payment voucher. | 28 | -0- | 669 | 2,149 | 4,165 | |
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Filled-In 2005 Annualized Estimated Tax Worksheet for Example 2.10 (continued) | Section B (For Figuring Your Annualized Estimated Self-Employment Tax) - Complete each column after end of period shown. | | | 1/1/05 to 3/31/05 | 1/1/05 to 5/31/05 | 1/1/05 to 8/31/05 | 1/1/05 to 12/31/05 | | 29 | Net earnings from self-employment for the period | 29 | 2,771 | 5,541 | 14,637 | 35,555 | | 30 | Prorated social security tax limit | 30 | $22,500 | $37,500 | $60,000 | $90,000 | | 31 | Enter actual wages for the period subject to social security tax or the 6.2% portion of the 7.65% railroad retirement (tier 1) tax | 31 | 0 | 0 | 0 | 0 | | 32 | Subtract line 31 from line 30. If zero or less, enter -0- | 32 | 22,500 | 37,500 | 60,000 | 90,000 | | 33 | Annualization amounts | 33 | 0.496 | 0.2976 | 0.186 | 0.124 | | 34 | Multiply line 33 by the smaller of line 29 or line 32 | 34 | 1,374 | 1,649 | 2,722 | 4,409 | | 35 | Annualization amounts | 35 | 0.116 | 0.0696 | 0.0435 | 0.029 | | 36 | Multiply line 29 by line 35 | 36 | 321 | 386 | 637 | 1,031 | | 37 | Add lines 34 and 36. Enter the result here and on line 13 of Section A | 37 | 1,695 | 2,035 | 3,359 | 5,440 | | 38 | Annualization amounts | 38 | 8 | 4.8 | 3 | 2 | | 39 | Deduction for one-half of self-employment tax. Divide line 37 by line 38. Enter the result here. Also use this result to figure your adjusted gross income on line 1. | 39 | 212 | 424 | 1,120 | 2,720 |
|
Table 1. Standard Deduction Chart for Most People* | If your filing status is: | Your standard deduction is: |
| Single | $5,000 |
| Married filing joint return or Qualifying widow(er) with dependent child | 10,000 |
| Married filing separate return | 5,000 |
| Head of household | 7,300 |
| *DO NOT use this chart if you were 65 or older or blind, OR if someone else can claim an exemption for you (or your spouse if married filing jointly). Use Table 2 or 3 instead. |
Table 2. Standard Deduction Chart for People Age 65 or Older or Blind* | Check the correct number of boxes below. Then go to the chart. |
| You | 65 or older  | Blind |
| Your spouse, if claiming spouse's exemption | 65 or older | Blind |
| Total number of boxes you checked |
| If your filing status is: | And the number in the box above is: | Your standard deduction is: |
| Single | 1 | $6,250 |
| | 2 | 7,500 |
| Married filing joint | 1 | 11,000 |
| return or Qualifying | 2 | 12,000 |
| widow(er) with | 3 | 13,000 |
| dependent child | 4 | 14,000 |
| Married filing | 1 | 6,000 |
| separate return | 2 | 7,000 |
| | 3 | 8,000 |
| | 4 | 9,000 |
| Head of household | 1 | 8,550 |
| | 2 | 9,800 |
| *If someone can claim an exemption for you (or your spouse if married filing jointly), use Table 3, instead. |
 | If you are married filling a separate return and your spouse itemizes deductions, or if you are a dual-status alien, you cannot take the standard deduction even if you were 65 or older or blind. |
Table 3. Standard Deduction Worksheet for Dependents* | If you were 65 or older or blind, check the correct number of boxes below. Then go to the worksheet. |
| You | 65 or older | Blind |
| Your spouse, if claiming spouse's exemption | 65 or older | Blind |
| Total number of boxes you checked |
| 1. | | Enter your earned income (defined below). If none, enter -0-. | 1. | |
| 2. | | Additional amount. | 2. | $250 |
| 3. | | Add lines 1 and 2. | 3. | |
| 4. | | Minimum amount. | 4. | $800 |
| 5. | | Enter the larger of line 3 or line 4. | 5. | |
| 6. | | Enter the amount shown below for your filing status. | | |
| | · | Single or Married filing separately - $5,000 | 6. | |
| | · | Married filing jointly or Qualifying widow(er) with dependent child - $10,000 | | |
| | · | Head of household - $7,300 | | |
| 7. | Standard deduction. | | |
| | a. | Enter the smaller of line 5 or line 6. If under 65 and not blind, stop here. This is your standard deduction. Otherwise, go on to line 7b. | 7a. | |
| | b. | If 65 or older or blind, multiply $1,250 ($1,000 if married or qualifying widow(er) with dependent child) by the number in the box above. | 7b. | |
| | c. | Add lines 7a and 7b. This is your standard deduction for 2005. | 7c. | |
| | | | | |
| Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. It also includes any amount received as a scholarship that you must include in your income. |
| *Use this worksheet ONLY if someone else can claim an exemption for you (or your spouse if married filing jointly). |
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