Publication 505 (2/2008), Tax Withholding and Estimated Tax

IRS Resources

4. Underpayment Penalty for 2007

Table of Contents

What's New for 2007

You should consider the items in this section when figuring any underpayment penalty for 2007.

Penalty rate. The penalty for underpayment of 2007 estimated tax is figured at an annual rate of 8% for the number of days the underpayment remained unpaid from April 15, 2007, through December 31, 2007, and 7% from January 1, 2008, through April 15, 2008.

Husband-wife business. . Beginning in 2007, if you and your spouse materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make an election to be taxed as a qualified joint venture instead of a partnership. For details, see the instructions for Schedule C (Form 1040) or Schedule F (Form 1040).

Discharge of debt. In some cases, you will not have taxable income on the forgiveness of your mortgage. See Publication 553 for more details.

Alternative minimum tax (AMT) exemption amount increased. . The AMT exemption amount will increase to $44,350 ($66,250 if married filing jointly or a qualifying widow(er); $33,125 if married filing separately).

Foreign earned income exclusion. If you claim the foreign earned income exclusion, the way you figure your tax may change. See Publication 4655, Supplemental Instructions for 2007 Form 1040 and Form 1040NR, for more details.

Introduction

If you did not pay enough tax, either through withholding or by making estimated tax payments, you will have underpaid your estimated tax and may have to pay a penalty.

You may understand this chapter better if you can refer to copies of your latest federal income tax returns.

No penalty. Generally, you will not have to pay a penalty for 2007 if any of the following situations apply.

The total of your withholding and estimated tax payments was at least as much as your 2006 tax (or 110% of your 2006 tax if your AGI was more than $150,000, $75,000 if your 2007 filing status is married filing separately), and you paid all required estimated tax payments on time.
The tax balance due on your return is no more than 10% of your total 2007 tax, and you paid all required estimated tax payments on time.
Your total 2007 tax (defined on page 49) minus your withholding is less than $1,000.
You did not have a tax liability for 2006.
You did not have any withholding taxes and your current year tax less any household employment taxes is less than $1,000.

Special rules apply if you are a farmer or fisherman.

IRS can figure the penalty for you. If you think you owe the penalty, but you do not want to figure it yourself when you file your tax return, you may not have to. Generally, the IRS will figure the penalty for you and send you a bill.

You only need to figure your penalty in the following three situations.

You are requesting a waiver of part, but not all, of the penalty.
You are using the annualized income installment method to figure the penalty.
You are treating the federal income tax withheld from your income as paid on the dates actually withheld.

However, if these situations do not apply to you, and you think you can lower or eliminate your penalty, complete Form 2210 or Form 2210-F and attach it to your return. See Form 2210 on page 49.

Topics - This chapter discusses:

The general rule for the underpayment penalty,
Special rules for certain individuals,
Exceptions to the underpayment penalty,
How to figure your underpayment and the amount of your penalty on Form 2210, and
How to ask IRS to waive the penalty.

Useful Items - You may want to see:

Form (and Instructions)

2210
Underpayment of Estimated Tax by Individuals, Estates, and Trusts
2210-F
Underpayment of Estimated Tax by Farmers and Fishermen

See chapter 5 for information about getting these forms.

General Rule

In general, you may owe a penalty for 2007 if the total of your withholding and estimated tax payments did not equal at least the smaller of:

90% of your 2007 tax, or
100% of your 2006 tax. (Your 2006 tax return must cover a 12-month period.)

Your 2007 tax, for this purpose, is defined under Total tax for 2007 on page 49.

Special rules for certain individuals. There are special rules for farmers and fishermen, and for certain higher income taxpayers.

Farmers and fishermen. If at least two-thirds of your gross income for 2006 or 2007 is from farming or fishing, substitute 66⅔% for 90% in (1) above.

See Farmers and Fishermen beginning on page 54.

Higher income taxpayers. If less than two-thirds of your gross income for 2006 and 2007 is from farming or fishing and your AGI for 2006 was more than $150,000 ($75,000 if your 2007 filing status is married filing a separate return), substitute 110% for 100% in (2) above.

For 2006, AGI is the amount shown on Form 1040, line 37; Form 1040A, line 21; and Form 1040EZ, line 4.

Penalty figured for each period. Because the penalty is figured separately for each payment period, you may owe a penalty for a payment period even if you later paid enough to make up the underpayment. If you did not pay enough tax by the due date of any of the payment periods, you may owe a penalty even if you are due a refund when you file your income tax return.

Example.

You did not make estimated tax payments for 2007 because you thought you had enough tax withheld from your wages. Early in January 2008, you made an estimate of your total 2007 tax. Then you realized that your withholding was $2,000 less than the amount needed to avoid a penalty for underpayment of estimated tax.

On January 10, you made an estimated tax payment of $3,000, which is the difference between your withholding and your estimate of your total tax. Your final return shows your total tax to be $50 less than your estimate, so you are due a refund.

You do not owe a penalty for your payment due January 15, 2008. However, you may owe a penalty through January 10, 2008, the day you made the $3,000 payment, for your underpayments for the earlier payment periods.

Minimum required each period. You will owe a penalty for any 2007 payment period for which your estimated tax payment plus your withholding for the period and overpayments for previous periods was less than the smaller of:

22.5% of your 2007 tax, or
25% of your 2006 tax. (Your 2006 tax return must cover a 12-month period.)

Note.

If you are subject to the rule for higher income taxpayers, discussed earlier, substitute 27.5% for 25% in (2) above.

When penalty is charged. If you miss a payment or you paid less than the minimum required in a period, you may be charged an underpayment penalty from the date the amount was due to the date the payment is made.

Trust payments of estimated tax. If you have estimated taxes credited to you from an estate or trust (Schedule K-1 (Form 1041), box 13, code A), treat the payment as made by you on January 15, 2008.

Amended returns. If you file an amended return by the due date of your original return, use the tax shown on your amended return to figure your required estimated tax payments. If you file an amended return after the due date of the original return, use the tax shown on the original return.

However, if you and your spouse file a joint return after the due date to replace separate returns you originally filed by the due date, use the tax shown on the joint return to figure your required estimated tax payments. This rule applies only if both original separate returns were filed on time.

2006 separate returns and 2007 joint return. If you file a joint return with your spouse for 2007, but you filed separate returns for 2006, your 2006 tax is the total of the tax shown on your separate returns. You filed a separate return if you filed as single, head of household, or married filing separately.

2006 joint return and 2007 separate returns. If you file a separate return for 2007, but you filed a joint return with your spouse for 2006, your 2006 tax is your share of the tax on the joint return. You are filing a separate return if you file as single, head of household, or married filing separately.

To figure your share of the taxes on a joint return, first figure the tax both you and your spouse would have paid had you filed separate returns for 2006 using the same filing status as for 2007. Then multiply the tax on the joint return by the following fraction.

	The tax you would have paid had you filed a separate return
	The total tax you and your spouse would have paid had you filed separate returns

Example.

Lisa and Paul filed a joint return for 2006 showing taxable income of $49,000 and a tax of $6,599. Of the $49,000 taxable income, $41,000 was Lisa's and the rest was Paul's. For 2007, they file married filing separately. Lisa figures her share of the tax on the 2006 joint return as follows.

2006 tax on $41,000 based on a separate return	$ 6,814
2006 tax on $8,000 based on a separate return	826
Total	$ 7,640
Lisa's percentage of total tax ($6,814 ÷ $ 7,640)	89.19%
Lisa's part of tax on joint return ($6,599 × 89.19%)	$ 5,886

Form 2210. In most cases, you do not need to file Form 2210. The IRS will figure the penalty for you and send you a bill. If you want us to figure the penalty for you, leave the penalty line on your return blank. Do not file Form 2210.

To determine if you should file Form 2210, see Part II of Form 2210. If you decide to figure your penalty, complete Part I, Part II, and either Part III or Part IV of Form 2210. If you use Form 2210, you cannot file Form 1040EZ.

On Form 1040, enter the amount of your penalty on line 77. If you owe tax on line 76, add the penalty to your tax due and show your total payment on line 76. If you are due a refund, subtract the penalty from the overpayment and enter the result on line 73.

On Form 1040A, enter the amount of your penalty on line 47. If you owe tax on line 46, add the penalty to your tax due and show your total payment on line 46. If you are due a refund, subtract the penalty from the overpayment and enter the result on line 43.

Lowering or eliminating the penalty. You may be able to lower or eliminate your penalty if you file Form 2210. You must file Form 2210 with your return if any of the following applies.

You request a waiver. See Waiver of Penalty on page 55.
You use the annualized income installment method. See the explanation of this method under Annualized Income Installment Method (Schedule AI) beginning on page 51.
You use your actual withholding for each payment period for estimated tax purposes. See Actual withholding method on page 51.
You base any of your required installments on the tax shown on your 2006 return and you filed or are filing a joint return for either 2006 or 2007, but not for both years.

Exceptions

Generally, you do not have to pay an underpayment penalty if either:

Your total tax is less than $1,000, or
You had no tax liability last year.

Less Than $1,000 Due

You do not owe a penalty if the total tax shown on your return minus the amount you paid through withholding (including excess social security and tier 1 railroad retirement (RRTA) tax withholding) is less than $1,000.

Total tax for 2007. For 2007, your total tax on Form 1040 is the amount on line 57 increased by certain other taxes and reduced by certain refundable credits.

Add the total of the following taxes to the amount on Form 1040, line 57.

Self-employment tax (line 58).
Tax from recapture of investment credit, low-income housing credit, qualified electric vehicle credit, Indian employment credit, new markets credit, alternative motor vehicle credit, alternative fuel vehicle refueling property credit, or credit for employer-provided childcare facilities (included on line 63).
Tax on early distributions from (a) an IRA or other qualified retirement plan, (b) an annuity, or (c) a modified endowment contract entered into after June 20, 1988 (included on line 60).
Tax on distributions from a Coverdell education savings account or a qualified tuition program not used for qualified education expenses (included on line 60).
Tax on Archer MSA or health savings account distributions not used for qualified medical expenses (included on line 63).
Section 72(m)(5) excess benefits tax (included on line 63).
Advance earned income credit payments (line 61).
Tax on accumulation distribution of trusts (included on line 63).
Interest due under sections 453(l)(3) and 453A(c) on certain installment sales of property (included on line 63).
An increase or decrease in tax as a shareholder in a qualified electing fund (included on line 63).
Tax on electing small business trusts included on Form 1041, Schedule G, line 7 (included on line 63).
Tax on income not effectively connected with a U.S. trade or business from Form 1040NR, lines 53 and 56 (included on line 63).
Household employment taxes, including any advance EIC payments made to your employees (line 62). See the Instructions for Form 2210, Line 2, for an exception to including this amount.
Additional tax on income you received from a nonqualified deferred compensation plan that fails to meet certain requirements (included on line 63).
Additional tax on recapture of a charitable contribution deduction relating to the contribution of a fractional interest in tangible personal property (included on line 63).
Additional tax from Form 8889, Health Savings Accounts (HSAs), Part III (included on line 63).

From the total of Form 1040, line 57 and the other taxes listed above, subtract the following refundable credits.

Earned income credit (line 66a).
Additional child tax credit (line 68).
Credit for federal tax paid on fuels (included on line 70).
Health coverage tax credit (included on line 70).
Refundable credit for prior year minimum tax (line 71).

Your total tax on Form 1040A is the amount on line 37 minus the amount on lines 40a and 41. Your total tax on Form 1040EZ is the amount on line 10 minus the amount on line 8a.

Paid through withholding. For 2007, the amount you paid through withholding on Form 1040 is the amount on line 64 plus any excess social security or tier 1 RRTA tax withholding on line 67. On Form 1040A, the amount you paid through withholding is the amount on line 38 plus any excess social security or tier 1 RRTA tax withholding included on line 42. On Form 1040EZ, it is the amount on line 7.

No Tax Liability Last Year

You do not owe a penalty if you had no tax liability last year and you were a U.S. citizen or resident for the whole year. For this rule to apply, your tax year must have included all 12 months of the year.

You had no tax liability for 2006 if your total tax was zero or you were not required to file an income tax return.

Example.

Ray, who is single and 22 years old, was unemployed for most of 2006. He earned $2,700 in wages before he was laid off, and he received $2,500 in unemployment compensation afterwards. He had no other income. Even though he had gross income of $5,200, he did not have to pay income tax because his gross income was less than the filing requirement for a single person under age 65 ($8,450 for 2006). He filed a return only to have his withheld income tax refunded to him.

In 2007, Ray began regular work as an independent contractor. Ray made no estimated tax payments in 2007. Even though he did owe tax at the end of the year, Ray does not owe the underpayment penalty for 2007 because he had no tax liability in 2006.

Total tax for 2006. For 2006, your total tax on Form 1040 is the amount on line 57 increased by certain other taxes and reduced by certain refundable credits.

Add the total of the following taxes to the amount on Form 1040, line 57.

Self-employment tax (line 58).
Tax from recapture of investment credit, low-income housing credit, qualified electric vehicle credit, Indian employment credit, new markets credit, alternative motor vehicle credit, alternative fuel vehicle refueling property credit, or credit for employer-provided childcare facilities (included on line 63).
Tax on early distributions from (a) an IRA or other qualified retirement plan, (b) an annuity, or (c) a modified endowment contract entered into after June 20, 1988 (included on line 60).
Tax on distributions from a Coverdell education savings account or a qualified tuition program not used for qualified education expenses (included on line 60).
Tax on Archer MSA or health savings account distributions not used for qualified medical expenses (included on line 63).
Section 72(m)(5) excess benefits tax (included on line 63).
Advance earned income credit payments (line 61).
Tax on accumulation distribution of trusts (included on line 63).
Interest due under sections 453(l)(3) and 453A(c) on certain installment sales of property (included on line 63).
An increase or decrease in tax as a shareholder in a qualified electing fund (included on line 63).
Tax on electing small business trusts included on Form 1041, Schedule G, line 7 (included on line 63).
Tax on income not effectively connected with a U.S. trade or business from Form 1040NR, lines 53 and 56 (included on line 63).
Household employment taxes, including any advance EIC payments made to your employees (line 62). See the Instructions for Form 2210, Line 2, for an exception to including this amount.
Additional tax on income you received from a nonqualified deferred compensation plan that fails to meet certain requirements (included on line 63).

From the total of Form 1040, line 57 and the other taxes listed above, subtract the following refundable credits.

Earned income credit (line 66a).
Additional child tax credit (line 68).
Credit for federal tax paid on fuels (included on line 70).
Health coverage tax credit (included on line 70).

Your total tax on Form 1040A is the amount on line 37 minus the amount on lines 40a and 41. Your total tax on Form 1040EZ is the amount on line 11 minus the amount on line 8a.

Figuring Your Required Annual Payment (Part I)

Figure your required annual payment in Part I of Form 2210, following the line-by-line instructions. If you rounded the entries on your tax return to whole dollars, you can round on Form 2210.

Example.

The tax on Ivy Fields' 2006 return was $10,000. Her AGI was not more than $150,000. The tax on her 2007 return (Form 1040, line 44) is $11,000. She does not claim any credits or pay any other taxes.

For 2007, Ivy had $1,600 income tax withheld and paid $6,800 estimated tax. Her total payments were $8,400. 90% of her 2007 tax is $9,900. Because she paid less than her 2006 tax ($10,000) and less than 90% of her 2007 tax, and does not meet an exception, Ivy knows that she owes a penalty for underpayment of estimated tax. The IRS will figure the penalty for Ivy, but she decides to figure it herself on Form 2210 and pay it with her $2,600 tax balance when she files her tax return.

Ivy's required annual payment is $9,900 ($11,000 × 90%) because that is smaller than her 2006 tax.

Figure 4-A on page 56 shows page 1 of Ivy's filled-in Form 2210. Her required annual payment of $9,900 is shown on line 9.

Different 2006 filing status. If you file a separate return for 2007, but you filed a joint return with your spouse for 2006, see 2006 joint return and 2007 separate returns on page 49 to figure the amount to enter as your 2006 tax on line 8 of Form 2210.

Short Method for Figuring the Penalty (Part III)

You may be able to use the short method in Part III of Form 2210 to figure your penalty for underpayment of estimated tax. If you qualify to use this method, it will result in the same penalty amount as the regular method. However, either the annualized income installment method or the actual withholding method, explained later, may result in a smaller penalty.

You can use the short method only if you meet one of the following requirements.

You made no estimated tax payments for 2007 (it does not matter whether you had income tax withholding).
You paid the same amount of estimated tax on each of the four payment due dates.

If you do not meet either requirement, figure your penalty using the regular method in Form 2210, Part IV.

Note.

If any payment was made before the due date, you can use the short method, but the penalty may be less if you use the regular method. If the payment was only a few days early, the difference is likely to be small.

You cannot use the short method if any of the following applies.

You made any estimated tax payments late.
You checked box C or D in Part II of Form 2210.
You are filing Form 1040NR or 1040NR-EZ and you did not receive wages as an employee subject to U.S. income tax withholding.

If you use the short method, you cannot use the annualized income installment method to figure your underpayment for each payment period. Also, you cannot use your actual withholding during each period to figure your payments for each period. These methods, which may give you a smaller penalty amount, are explained starting on page 51 under Figuring Your Underpayment (Part IV, Section A).

Completing Part III. Complete Part III of Form 2210 following the line-by-line instructions.

First, figure your total underpayment for the year (line 14) by subtracting the total of your withholding and estimated tax payments (line 13) from your required annual payment (line 10). Then figure the penalty you would owe if the underpayment remained unpaid up to April 15, 2008. This amount (line 15) is the maximum estimated tax penalty on your underpayment.

Next, figure any part of the maximum penalty you do not owe (line 16) because your underpayment was paid before the due date of your return. For example, if you filed your 2007 return and paid the tax balance on April 3, 2008, you do not owe the penalty for the 12-day period from April 4 through April 15. Therefore, you would figure the amount to enter on line 16 using 12 days.

Finally, subtract from the maximum penalty amount (line 15) any part you do not owe (line 16). The result (line 17) is the penalty you owe. Enter that amount on line 77 of Form 1040 or line 47 of Form 1040A. Attach Form 2210 to your return only if you checked one of the boxes in Part II.

Example.

Assume the same facts for Ivy Fields as in the previous example on page 50. Ivy paid her estimated tax payments in four installments of $1,700 ($6,800 ÷ 4) each on the dates they were due.

Ivy qualifies to use the short method to figure her estimated tax penalty. Using the annualized income installment method or actual withholding will not give her a smaller penalty amount because her income and withholding were distributed evenly throughout the year. Therefore, she figures her penalty in Part III of Form 2210 (see Figure 4-A (Continued) on page 57) and leaves Part IV (not shown) blank.

Ivy figures her $1,500 total underpayment for the year (line 14) by subtracting the total of her withholding and estimated tax payments ($8,400) from her $9,900 required annual payment (line 10). The maximum penalty on her underpayment (line 15) is $76 ($1,500 × .05057).

Ivy plans to file her return and pay her $2,600 tax balance on March 14, 2008, 32 days before April 15. Therefore, she does not owe part of the maximum penalty amount. The part she does not owe (line 16) is figured as follows.

$1,500 × 32 × .00019 = $9

Ivy subtracts the $9 from the $76 maximum penalty and enters the result, $67, on Form 2210, line 17, and on Form 1040, line 77. She adds $67 to her $2,600 tax balance and enters the result, $2,667 on line 76 of her Form 1040. Ivy files her return on March 14 and attaches a check for $2,667. Because Ivy did not check any of the boxes in Part II, she does not attach Form 2210 to her tax return.

Regular Method for Figuring the Penalty (Part IV)

You may use the regular method in Part IV of Form 2210 to figure your penalty for underpayment of estimated tax if you paid one or more estimated tax payments earlier than the due date.

You must use the regular method in Part IV of Form 2210 to figure your penalty for underpayment of estimated tax if any of the following apply to you.

You paid one or more estimated tax payments on a date after the due date.
You paid at least one, but less than four, installments of estimated tax.
You paid estimated tax payments in un-
equal amounts.
You use the annualized income installment method to figure your underpayment for each payment period.
You use your actual withholding during each payment period to figure your payments.

If you use the regular method, figure your underpayment for each payment period in Section A, then figure your penalty for each payment period in Section B.

Figuring Your Underpayment (Part IV, Section A)

Figure your underpayment of estimated tax for each payment period in Section A following the line-by-line instructions. Complete lines 20 through 26 of the first column before going to line 20 of the next column.

Required installments—line 18. Your required payment for each payment period (line 18) is usually one-fourth of your required annual payment (Part I, line 9). However, if you are using the annualized income installment method (described beginning on this page), first complete Schedule AI (Form 2210), and then enter the amounts from line 25 of that schedule on line 18 of Form 2210.

Payments. On line 19, enter in each column the total of:

Your estimated tax paid after the due date for the previous column and by the due date shown at the top of the column, and
One-fourth of your withholding.

For special rules for figuring your payments, see the Instructions for Form 2210.

If you file Form 1040, your withholding is the amount on line 64, plus any excess social security or tier 1 RRTA tax withholding on line 67. If you file Form 1040A, your withholding is the amount on line 38 plus any excess social security or tier 1 RRTA tax withholding included in line 42.

Actual withholding method. Instead of using one-fourth of your withholding for each quarter, you can choose to use the amounts actually withheld by each due date. You can make this choice separately for the tax withheld from your wages and for all other withholding. This includes any excess social security and tier 1 RRTA tax withheld.

Using your actual withholding may result in a smaller penalty if most of your withholding occurred early in the year.

If you use your actual withholding, you must check box D in Form 2210, Part II. Then complete Form 2210 and file it with your return.

Regular Installment Method

If you received your income evenly throughout the year, use the regular installment method to figure your estimated tax underpayment for the year.

Example.

Ben Brown's 2007 total tax (Form 1040, line 63) is $7,031, the total of his $4,685 income tax and $2,346 self-employment tax. His 2006 AGI was less than $150,000. He does not owe any other taxes or claim any credits other than for withholding. His 2006 tax was $6,116. See Figure 4-B on page 58 to see Ben's completed Form 2210, Part I.

Ben's employer withheld $3,228 income tax during 2007. Ben paid no estimated tax for either the first or second period, but he paid $1,000 each on August 31, 2007, and January 11, 2008, for the third and fourth periods. Because the total of his withholding and estimated tax payments, $5,228 ($3,228 + $1,000 + $1,000), was less than both 90% of his 2007 tax (90% x $7,031 = $6,328), and 100% of his 2006 tax ($6,116), Ben knows he owes a penalty for underpayment of estimated tax. He decides to figure the penalty on Form 2210 and pay it with his $1,803 tax balance ($7,031 - $5,228) when he files his tax return on April 15, 2008.

Ben's required annual payment (Part I, line 9) is $6,116. Because his income and withholding were distributed evenly throughout the year, Ben enters one-fourth of his required annual payment, $1,529, in each column of line 18 (see Figure 4-B (Continued) on page 59). On line 19, he enters one-fourth of his withholding, $807, in the first two columns and $1,807 ($807 plus $1,000 estimated tax payment) in the last two columns.

Ben has an underpayment (line 25) for each payment period even though his withholding and estimated tax payments for the third and fourth periods were more than his required installments (line 18). This is because the estimated tax payments made in the third and fourth periods are first applied to underpayments for the earlier periods.

Annualized Income Installment Method (Schedule AI)

If you did not receive your income evenly throughout the year (for example, your income from a repair shop you operated 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 (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 Schedule AI of Form 2210 (see Figure 4-C on page 60 for an example). The schedule annualizes your tax at the end of each payment period based on your income, deductions, and other items relating to events that occurred since 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. You also must attach Form 2210 and Schedule AI to your return.

If you use Schedule AI for any payment due date, you must use it for all payment due dates.

Completing Schedule AI. 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).

Period (a) includes items for January 1 through March 31.
Period (b) includes items for January 1 through May 31.
Period (c) includes items for January 1 through August 31.
Period (d) includes items for the entire year.

Example. Laura Maple files as head of household with two exemptions. Her 2007 total tax (Form 1040, line 63) is $3,980, the total of her $1,634 income tax and $2,346 self-employment tax. Laura also has an earned income credit (EIC) of $450, and her current year tax is $3,530 ($3,980 less the $450 EIC). She does not owe any other taxes. Her 2006 AGI was less than $150,000. Her 2006 tax was $4,032. Her required annual payment on Form 2210, Part I, line 9, is $3,177 (the smaller of her $4,032 tax for 2006 or 90% of her $3,530 current year tax after credits for 2007).

Laura's employer withheld $1,500 income tax during 2007. Laura paid no estimated tax for either the first or second period, but she paid $100 on August 15, 2007, and $500 on December 3, 2007, for the third and fourth periods.

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, beginning on page 60, shows Laura's filled-in Schedule AI and Part IV, Section A.

Laura's wages during 2007 were $15,000 ($1,250 a month). Her net earnings from a business she started during the year were $16,600, received as follows.

April through May	$3,600
June through August	5,000
September through December	8,000

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 $3,600 for the second period, $8,600 ($3,600 + $5,000) for the third period, and $16,600 ($8,600 + $8,000) 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. See Figure 4-C on page 60.

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:

8 for the first period,
4.8 for the second period,
3 for the third period, and
2 for the fourth period.

Line 1—AGI. Laura figures the amounts to enter on Schedule AI, line 1, as follows.

Column (a)—1/1/07 to 3/31/07:
$1,250 per month × 3 months		$3,750
Column (b)—1/1/07 to 5/31/07: $1,250 per month × 5 months		$6,250
Plus:	Self-employment income through 5/31/07	3,600
Less:	Self-employment tax deduction ($1,221 ÷ 4.8)	(254)
		$9,596
Column (c)—1/1/07 to 8/31/07: $1,250 per month × 8 months		$10,000
Plus:	Self-employment income through 8/31/07	8,600
Less:	Self-employment tax deduction ($1,822 ÷ 3)	(607)
		$17,993
Column (d)—1/1/07 to 12/31/07:
$1,250 per month × 12 months		$15,000
Plus:	Self-employment income through 12/31/07	16,600
Less:	Self-employment tax deduction ($2,346 ÷ 2)	(1,173)
		$30,427

Line 4—Itemized deductions. Laura had $9,000 in itemized deductions for 2007—$200 per month withheld for state and local taxes, and $550 per month for mortgage interest—for a total of $750 each month. She divided them by period in the following manner.

1st period: $2,250 ($750 × 3 months).
2nd period: $3,750 ($750 × 5 months).
3rd period: $6,000 ($750 × 8 months).
4th period: $9,000 ($750 × 12 months).

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 for that period. Figure 4-C on page 60 shows her completed Parts I and II.

Underpayment. 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 two payment periods, but underpaid her estimated tax for the last two payment periods.

Figuring Your Penalty (Part IV, Section B)

Figure the amount of your penalty in Section B following the instructions. The penalty is imposed on each underpayment shown on Section A, line 25, for the number of days that it remained unpaid. (You may find it helpful to show the date of payment beside each amount on line 25.)

For 2007, there are two rate periods to figure the penalty. Use Rate Period 1 (lines 27 and 28) to apply the 8% rate in effect between April 16, 2007, and December 31, 2007. Use Rate Period 2 (lines 29 and 30) to apply the 7% rate in effect between January 1, 2008, and April 15, 2008.

Aid for counting days. Table 4-1 (see page 53) provides a simple method for counting the number of days between payment dates or between a due date and a payment date.

Find the number for the date the payment was due by going across to the column of the month the payment was due and moving down the column to the due date.
In the same manner, find the number for the date the payment was made.
Subtract the due date “number” from the payment date “number.”

For example, if a payment was due on June 15 (61), but was not paid until November 4 (203), the payment was 142 (203 - 61) days late.

Table 4-1. Calendar To Determine the Number of Days a Payment Is Late

Instructions.Use this table with Form 2210 if you are completing Part IV, Section B. First, find the number for the payment due date by going across to the column of the month the payment was due and moving down the column to the due date. Then, in the same manner, find the number for the date the payment was made. Finally, subtract the due date number from the payment date number. The result is the number of days the payment is late.

Example.The payment due date is June 15 (61). The payment was made on November 4 (203). The payment is 142 days late (203 - 61).

Tax Year 2007
Day of	2007	2007	2007	2007	2007	2007	2007	2007	2007	2008	2008	2008	2008
Month	April	May	June	July	Aug.	Sept.	Oct.	Nov.	Dec.	Jan.	Feb.	Mar.	Apr.
1		16	47	77	108	139	169	200	230	261	292	321	352
2		17	48	78	109	140	170	201	231	262	293	322	353
3		18	49	79	110	141	171	202	232	263	294	323	354