Desktop: Form 2210 - Underpayment of Estimated Tax

Form 2210 - Underpayment of Estimated Tax 

Individuals, estates and trusts use Form 2210 to evaluate whether they may be penalized for failure to fully pay their income taxes. The IRS can identify any penalty and send the bill to the taxpayer without the taxpayer completing the form. The form has a flowchart on the first page that may be used to check whether the form needs to be completed and the subsequent penalty calculation requirement.

One may file Form 2210 when;

• ·         Requesting a penalty waiver
• ·         Calculating return`s underpayment penalty as well as its inclusion
• ·         Using an annualized installment approach instead of regular approach to calculate the underpayment penalty.

Reasons for Making Estimated Payments

Income tax not subjected to withholding is paid through estimated tax. Estimated tax generates income on assets, dividends, interests, alimony, rental profits, awards and prizes. Suppose one`s withheld tax from pension or salary is insufficient, one may also pay estimated tax. Both self-employment and income tax together with any other tax on the tax return can be paid using estimated tax.

When should one pay estimated tax?

Estimated tax is paid quarterly every year at a specific due date. Failure to pay estimated tax within the maturity date for every quarter of the year may amount to a penalty even though one may be expecting a refund upon filing tax return. For more information on underpayment of tax, consult the Waiver of Penalty.

Individuals and businesses can easily pay federal taxes such as federal tax deposits, installment agreement payments and estimated tax payments through the Electronic Federal Tax Payment System (EFTPS). Estimated tax payments can be made weekly, after a fortnight or monthly so long as the payments are within quarterly due date.

Penalty exceptions

One may not be penalized if;

• ·         They were citizens of the U.S or residents for the whole year, they had zero tax liability for the previous year and the previous year`s tax return was or would have been for entire 12 months had they been needed to file returns.
• ·      The difference between the total tax for the current year and tax through withholding is below $1,000.

Fishermen and farmers are exempted in the event that;

• ·         Their gross income is at least two thirds of the annual gross income for both current and previous tax years.
• ·         They had paid all tax by March 1 through filing Forms 1040 or 1040-SR.

One may use Form 2210, Underpayment of Estimated Tax by Farmers and Fishermen to determine if a farmer or fisherman stands to be penalized where they had sufficient gross income but had not filed forms 1040 or 1040-SR. Whoever has insufficient Gross Income must file Form 2210.

Waiver of Penalty

IRS may waiver penalty for a taxpayer who has an underpayment suppose:

• ·         The taxpayer, after attaining 62 years old in 209 or 2020 retired or was disabled and had a due underpayment for reasonable causes.
• ·         A federally declared disaster, a casualty or any other unusual circumstance caused the underpayment thus imposing a penalty would lead to inequity.

One requests for a waiver by indicating code A or B under Part II.

Penalty Reduction

Annualizing an income received erratically throughout the year maybe lowered or even avoided by the taxpayer.

To calculate the penalty through the annualized income installment approach, one must complete Schedule AI.

Steps for Navigation

Sometimes the system might indicate a Diagnostic Warning for need of Form 2210. One must ensure that the estimated payments and federal tax withholdings are filled in the return before completing Form 2210.

You should be able to access Form 2210 by selecting;

• ·         Payment, Estimates $ EIC
• ·         Underpayment of Estimated Tax (2210)
• ·         Prior Year Tax (suppose the prior year tax has not been generated from the previous year`s return, you should enter it. Where the current year`s AG exceeds $150,000 or $75,000 for MFS, you should multiply the previous year`s tax by 110% so long as the taxpayer is not a fisherman or farmer).

For those completing the form, continue by selecting:

• ·         Are You Eligible to Use the Short Method? –Even though the system has an automatic YES for this question, it is best that you confirm for the purposes of this return. Suppose either of the below statements is true for estimated taxes or the third statement is true for the entire underpayment for the year, a taxpayer may use the short method. The statements are:

1. No estimated tax payments was made by the taxpayer.
2. The individual fulfilled the quarterly payments of the same amount in good time.
3. The taxpayer failed to pay the entire yearly underpayment (Line 14) on or before 15 January of the next year.

Where the taxpayer can use the short method continue as follows:

• ·         Underpayment Date for the 2210 Short Method-this is only relevant for someone who wants to enter the date otherwise leave it blank. The date required here refers to the date when a full payment of the entire underpayment was made. Do not complete and file Form2210 unless code E reason suffices if the underpayments was made on or before January 15.
• ·         Part ii-Reasons for Filing Form 2210- To file Form 2210 one must select a reason. Selecting B for annualized income installment approach and code C for treating withholdings as estimated payments requires the use of regular method and not the short method.
• ·         Part IV-Figure Your Underpayment (Regular Method)-This is necessary where one does not want to use the annualized method, unable to use the regular method or prefers the short method.
• ·         Schedule AI-Part I & Part II-This applies to whoever wants to use the annualized method.

For more information:

IRS: Instructions for Form 2210

IRS: Publication 505 - Tax Withholding and Estimated Tax