Form 2210 Annualized Income - How to annualize itemized deductions?

[stife94]

Filling out Form 2210 page 3 Schedule AI

Line 4 is for itemized deductions. Does anyone know how to handle state and local income taxes which are capped at $10,000? 

Say for example I had $3000 in state, local and property taxes in the first three months of the year. The "annualization" factor is 4 which would make that part of my annual deductions $12,000. I know it's capped at $10,000 so am I supposed to only count $2,500? The next quarter is actually only two months. Would I cap myself at $1,666,67 (2/12 *10,000). No guidance on the IRS website.

[fanfare]

instructions for Form 2210 schedule AI tells you exactly what to do.

[stife94]

It just says to add up the deductions for each period. Yeah, I can add my state and local income plus property taxes (and other deductions) for each period. Turbo Tax autofills the fourth column and DID cap the deduction i.e. they use the amount actually on Schedule A for the entire year. Seems odd to use two different methods on the same line. That's why I'm asking.

[fanfare]

In your example,

for the first three periods  jan-mar, jan-may jan-aug
you haven't hit the SALT cap yet.

@stife94 

[stife94]

If I annualize the first quarter by multiplying by 4, it exceeds the SALT cap. I had to make a Q4 2021 estimate payment in January 2022. Combined with my Q1 2022 W-2 withholding, multiplying by 4 makes the deductions look ridiculous compared to the year end. And ignoring the annualization factor, I exceed the cap about half way through the year.

[fanfare]

"If I annualize the first quarter by multiplying by 4, it exceeds the SALT cap."

irrelevant

"I had to make a Q4 2021 estimate payment in January 2022. Combined with my Q1 2022 W-2 withholding,"

why are you considering these amount.?

Line 4 is itemized deductions for the period. That's all.

[stife94]

"If I annualize the first quarter by multiplying by 4, it exceeds the SALT cap."

irrelevant

How did you reach that conclusion?

"I had to make a Q4 2021 estimate payment in January 2022. Combined with my Q1 2022 W-2 withholding,"

why are you considering these amount.?

Line 4 is itemized deductions for the period. That's all.

State taxes are a deductible expense when paid. Turbotax asks you if you made any payments for previous years. They're on the Schedule A Line 5 worksheet.

[Mike9241]

i would say you must take any limitations into account for each period so if you paid more than $2500 in deductible taxes the first period use $2500 to limit it to $10K, then a max of $4167 the 2nd period,

$6667 the 3rd.  the 4th should be automatic because that populated from your return.

[fanfare]

in the example the SALT deductions for the first period were $3,000, which means the property tax was no more than $3000.

The SALT limit is $10,000. he didn't reach that yet.

even with February property tax due of 10,000 the available deduction in the first quarter could be more than $10,000 after mortgage interest or charitable donations.

[dmertz]

The IRS does not seem to have provided any specific guidance on this, but I agree with fanfare.  I would consider all payments made until the limit is reached to be deductible, so I would report that actual amounts of SALT paid per quarter until the quarter where the total would exceed $10,000 and only  then limit the total to $10,000.  For example, if the actual amounts paid were $4,000 each quarter, I would report $4,000 for Q1, $4,000 for Q2, $2,000 for Q3 and $0 for Q4.

[fanfare]

It is INTERVAL 1-4, not quarter 1-4

The SALT amounts would be I-1 $4000, I-2   $8,000   I-3 10,000, I-4 10,000

then add other applicable deductions for that interval.

It think it's pretty clear, without  additional "specific guidance"

@dmertz 

[dmertz]

Thanks.  I was indicating the amount of additional SALT deductions each quarter instead of the running totals to be entered on Schedule AI.

[stife94]

If you count $4000 in the first quarter it is going to get "annualized" to $16,000 which already exceeds the cap.

I did the numbers both ways over the weekend. By the second period the annualization factor of 2.4 was making my "deductions" more than double the year-end allowable amount . Fortunately, annualizing my income got rid of most of the penalty.

[dmertz]

"If you count $4000 in the first quarter it is going to get "annualized" to $16,000 which already exceeds the cap."

That's a good point.  I forgot that the amounts get annualized by multiplying by the annualization factor.  Perhaps it makes more sense to put an upper limit on the SALT deduction each quarter of $10,000 divided by the annualization factor:  $2,500 for Q1, $4,167 for Q2, $6,667 for Q3 and $10,000 for Q4.

[stife94]

This is what I will end up doing. And I just noticed that the sum of my third period deductions (i.e. including all property and state and local income taxes without cap) before annualizing exceeds my allowed deductions for the entire year (line 4 of column C exceeds column D which is autogenerated by Turbo Tax). This generates an error in the program.