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IRS.gov Website
Publication 505
taxmap/pubs/p505-025.htm#en_us_publink1000255640

Annualized Income Installment Method (Schedule AI)(p52)

rule
If you did not receive your income evenly throughout the year (for example, your income from a shop you operated at a marina was much larger in the summer than it was during the rest of the year), you may be able to lower or eliminate your penalty by figuring your underpayment using the annualized income installment method. Under this method, your required installment (Part IV, line 18) for one or more payment periods may be less than one-fourth of your required annual payment.
To figure your underpayment using this method, complete Form 2210, Schedule AI (see Figure 4-C on page 60 for an example). Schedule AI annualizes your tax at the end of each payment period based on your income, deductions, and other items relating to events that occurred from the beginning of the tax year through the end of the period.
If you use the annualized income installment method, you must check box C in Part II of Form 2210. Also, you must attach Form 2210 and Schedule AI to your return.
EIC
If you use Schedule AI for any payment due date, you must use it for all payment due dates.
taxmap/pubs/p505-025.htm#en_us_publink1000255624

Completing Schedule AI.(p52)

rule
Follow the Form 2210 instructions to complete Schedule AI. For each period shown on Schedule AI, figure your income and deductions based on your method of accounting. If you use the cash method of accounting (used by most people), include all income actually or constructively received during the period and all deductions actually paid during the period.
Note.Each period includes amounts from the previous period(s).
taxmap/pubs/p505-025.htm#en_us_publink1000255626

Example.(p52)

rule
Laura Maple files as head of household with three exemptions. Her 2010 total tax (Form 1040, line 60) is $4,730, the total of her $2,384 income tax and $2,346 self-employment tax. Laura also has two refundable credits, making work pay ($400) and earned income credit (EIC) ($113). Her current year's tax is $4,217 ($4,730 − $513 refundable credits). She does not owe any other taxes. Her 2009 AGI was less than $150,000. Her 2009 tax was $4,100. Her required annual payment on Form 2210, Part I, line 9, is $3,795 (the smaller of her $4,100 tax for 2009 or 90% of her $4,217 tax after refundable credits for 2010).
Laura's employer withheld $756 income tax during 2010. Laura made no estimated tax payments for the first, second or third periods, but she paid $100 on January 15, 2011, for the fourth period.
Laura did not receive her income evenly throughout the year. Therefore, she decides to figure her required installment for each period (Part IV, line 18) using the annualized income installment method. To use this method, Laura completes Schedule AI before starting Part IV. Figure 4-C, on pages 60 though 62, shows Laura's filled-in Schedule AI, Part IV, and Penalty Worksheet.
Laura's wages during 2010 were $24,396 ($2,033 per month). Her net earnings from a business she started during the year was $16,600 (Schedule SE, line 2), received as follows. Laura did not have a self-employed health insurance deduction.
April through May$  1,000
June through August2,500
September through December13,100
Self-employment tax and deduction. Before Laura can figure her AGI for each period (Schedule AI, line 1), she must figure her deduction for self-employment tax for each period. To do this, she first completes Schedule AI, Part II (see Figure 4-C on page 60).
Laura had no self-employment income for the first period, so she leaves the lines in that column blank. Her self-employment income was $1,000 for the second period, $3,500 ($1,000 + $2,500) for the third period, and $16,600 ($3,500 + $13,100) for the fourth period. She multiplies each amount by 92.35% (.9235) to find the amounts to enter on line 26. She then fills out the rest of Part II.
Laura figures the deduction for one-half of the self-employment tax by dividing the amounts on line 34 by the annualization amounts for each period. The annualization amounts are:
taxmap/pubs/p505-025.htm#en_us_publink1000255630
Line 1—AGI.(p52)
Laura figures the amounts to enter on Schedule AI, line 1, as follows.
Column (a)—1/1/10 to 3/31/10:  
$2,033 per month × 3 months$ 6,099
Column (b)—1/1/10 to 5/31/10:
$2,033 per month × 5 months
$10,165
Plus:Self-employment income through 5/31/10+ 1,000
Less:Self-employment tax deduction ($339 ÷ 4.8)−     71
   $11,094
Column (c)—1/1/10 to 8/31/10:
$2,033 per month × 8 months
$16,264
Plus:Self-employment income through 8/31/10+ 3,500
Less:Self-employment tax deduction ($742 ÷ 3)−    247
   $19,517
    
Column (d)—1/1/10 to 12/31/10:  
$2,033 per month × 12 months$24,396
Plus:Self-employment income through 12/31/10+16,600
Less:Self-employment tax deduction ($2,346 ÷ 2)−  1,173
   $39,823
taxmap/pubs/p505-025.htm#en_us_publink1000255632
Line 4—Itemized deductions.(p53)
Laura had $9,000 in itemized deductions for 2010—$50 per month withheld for state and local taxes, $550 per month for mortgage interest, and $150 per month in charitable contributions—for a total of $750 each month. She divided them by period in the following manner. She enters each amount on line 4 in the proper column for that period.
Now that Laura has figured her entries for lines 1 and 4, she can complete the rest of Schedule AI to determine the amounts to put on Form 2210, Part IV, line 18. Laura figures her EIC on Schedule AI, line 16, for each period using her annualized earned income (Schedule AI, line 3) for that period. Figure 4-C on page 60 shows her completed Parts I and II of Schedule AI.
taxmap/pubs/p505-025.htm#en_us_publink1000255634
Underpayment.(p53)
Laura then figures her underpayment in Part IV, Section A (see Figure 4-C (Continued) on page 61). She finds that she overpaid her estimated tax for the first three payment periods, but underpaid her estimated tax for the last payment period. She used the Penalty Worksheet (see Figure 4-C (Continued) on page 62) to figure her penalty of $21.74. She enters that amount on line 27 of Form 2210 and Line 77 of her Form 1040. She also adds $21.74 to her total tax balance and enters the $3,382.74 total on line 76. She files her return on April 15 and includes a check for $3,382.74. Because she used the annualized income installment method, she must attach Form 2210, including Schedule AI, to her return and check box C in Part II.