Form 2210 Schedule AI Applicable Percentage

[Lanikai200]

Can someone explain where the pre-filled applicable percentage on line 10 of form 2210 Schedule AI comes from? See snippets below. I think the IRS takes 90% of the period and puts the % there. For example, column (a) is 3 months. That is 25% of a year. Take 90% of that, and you get 22.5%. That checks. It also works for column (d). However, column (b) doesn't work. (b) is 5 months. That is 42% of a year. 90% of that is 38%, but the IRS pre-fills in 45%. Same issue in column (c). The result is columns (b) and (c) will artificially tell you to pay more than you really are supposed to. Someone tell me if I have this wrong. Thanks for the help. 

[Lanikai200]

This might help illustrate my logic a little better.

[fanfare]

@Lanikai200 

Why are you worried about this?

Why are you trying to impose some complicated rule on top of IRS's simple rule?

The amount is 22.5% x N where N is the column number.

I believe that is called evenly divided into four ES payments.

[Lanikai200]

Yes, it's simple to multiply the numbers. The issue is that the pre-filled 45% in colume (b) and 67.5% in column (c) are too high unless I am missing where those numbers came from. Since they are too high, the schedule calculates quarterly payments for quarters 2 and 3 (columns (b) and (c)) that are too high. So you owe a penalty that you shouldn't actually owe. I don't like to pay penalties, especially ones I shouldn't actually owe.

[mwins588]

I just ran across this error as well (at least, it appears to be an error to me). @Lanikai200 -- I assume you've figured this out by now, but it looks like for column (b), Turbotax incorrectly treats the period as 6 months (through the end of June), not 5 (through the end of May). And 90% * 6/12 months = 45%. Similarly, for column (c), they use 9 months instead of 8 -- 90% * 9/12 months = 67.5%. Unfortunately, the latest updates, as of April 2, don't include a fix for this.

Note that the Annualization Amounts for columns (a) through (d) are 4, 2.4, 1.5, and 1, respectively (i.e. 12/3 months, 12/5 months, 12/8 months, and 12/12 months); the Applicable Percentages should be the inverse of those (then multiplied by 90%).

[Lanikai200]

Yes @mwins588 , I agree exactly with what you said, although I think the issue is with the IRS form itself, and Turbotax is simply following the form.

[Critter-3]

Those amounts are cumulative like the other amounts in each column and it what the IRS has pre filled in on the form 2210 so you cannot change those amounts.   

Note the 2210 has lots of pre set amounts ...  read the IRS instructions for clarity.   

https://www.irs.gov/forms-pubs/about-form-2210

[Lanikai200]

Yes, these (incorrect) percentages are pre-filled by IRS and you can't change them. The incorrect percentages effectively over-charge you for Q2 and Q3 quarterly taxes. This problem continued in the 2023 form and I'm sure will keep happening until someone at the IRS looks at the form and realizes there is an error.

[NCperson]

there is no error...the form annualizes income and the percentages highlighted in yellow relate to that math 

"2nd quarter" is based on FIVE months of income - not 6

"3rd quarter" is based on EIGHT months of income - not 9 

look at the title line at the very top of the schedule: the 2nd column ends at the end of May (not June) and the 3rd column ends at the end of August (not September).

https://www.irs.gov/pub/irs-pdf/f2210.pdf

[Lanikai200]

Yes, the headings say 5 months for 2nd quarter and 8 months for 3rd quarter, so the pre-filled percentages for the 2nd quarter numbers should be based on 5 months and the 3rd quarter numbers on 8 months.

But the pre-filled percentage calculation on line 20 is therefore wrong. 5 out of 12 months (for Quarter 2) is 41.7%; when you take 90% of that, you get 37.5%. That's what the pre-filled number on line 20 for quarter 2 should be. But they filled in 45% instead, which makes the amount of estimated tax for the 2nd quarter too high. Same issue for quarter 3. Quarters 1 and 4 are correct.

[VolvoGirl]

It must not be using the dates at the top for that part.  If you notice column d is only 90%.   Each column is adding 22.5% which is 1/4 of 90.  

[NCperson · Accepted solution]

 I think you are misunderstanding the form's approach: the form is correct.

You are required to pay 90% of your tax liability in EVEN quarterly installments, hence the 22.5%, 45%, etc.  That is the law, even though the 2nd payment is due in June (and not July) and the 3rd payment is due is Sept (and not Oct).  Do not confuse logic with the law! Law trumps logic! 

However, the data used to determine the annualized income is predicated on 3 months year to date, 5 months year to date, 8 months year to date, etc. 

For the 2nd quarterly payment, five months of income is ANNUALIZED to determine the ANNUALIZED tax liability and since half of 90% of due under law, then 45% is the appropriate factor. 

Make sense? (and if not, contact your Congressman - they passed this law!)

@Lanikai200

[Lanikai200]

@NCperson - Thanks. "Law trumps logic"...I think I get it now. 

I also saw another good posting that helped me understand this is a quirk of the IRS and law, whether they did this intentionally or not.

https://ttlc.intuit.com/community/taxes/discussion/if-i-use-annualized-installment-for-estimated-tax...

[NCperson]

and it is possible that at some point back in time Congress accelerated the Oct payment to Sept as a budget gimmick.  Since the US fiscal year ends in Sept, accelerating the due date from Oct 15 to Sept 15 would have helped balance a budget when such things really mattered.  

Why July was accelerated to June, I don't have any possible rationale for that one,