How to calculate Form 2210AI, Line 1?: Adjusted Gross Income for each period | annualized income method

[GreenHaven]

Hello - I really need help on what to include and deduct to calculate each tax payment period's adjusted gross income as is needed for Form 2210AI, Line 1.  In my case for 2024, I have only interest and dividends as income for all four periods with a Roth conversion in the 4th period.

In my calculation for each period, I included only interest, dividends and the Roth conversion for each quarter.  Is this correct or do I need to adjust for any 2024 adjustments in those numbers? 

For example, my only two adjustments on my 1040 for my full year AGI are an HSA contribution ($10,300 for spouse and myself) and a capital loss of -$3,000.  To calculate the number on Form 2210AI, Line 1, should I adjust the total of my dividends, interest and Roth conversions for each period with an HSA and capital loss adjustment for that period?  If so, how is that done?  -Thank you

[BillM223]

"an HSA contribution ($10,300 for spouse and myself"

Except in a very rare case, this contribution to an HSA is an excess contribution. If the contributions were through an employer, then the excess amount would be added to Other income.

In any case, before we can work on your AGI per quarter, we need to know more about this HSA situation. Were these contributions through one employer or direct to the HSA? Did you go through the HSA interview and get the excess contribution error message?

I ask this because we can't use the HSA contribution as is no matter what.

[GreenHaven]

Thank you for your reply. The HSA contributions for both my wife and myself were not done through an employer; we contributed directly ourselves. We did go through the HSA interview in TT and did not receive an error message. At our ages, the max contribution for 2024 is $5150 each and we both have high deductible health insurance. We are retired and not employed. 

[baldietax]

you should basically aportion all the income items which result in your AGI so anything on your 1040 in Lines 1-10 which includes the HSA adjustment on line 10.  Check also the instructions for Form 2210: "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."

I went thru this for same situation, I went thru the interest, dividends, cap gains etc line by line to build that view in Excel.  You may find for some income that the result is not materially different from just doing a pro-rata if that income flow was steady thru the year.  Maybe your net capital loss -3k was actually made up of some gains and losses in different quarters which may create some uneven AGI, possibly causing other penalty situation if say the gains occurred earlier in the year.  Depends on your situation and how material it all is vs. the Roth and Q4 estimated tax I assume you are trying to eliminate the penalty on.

Also check your state requirements for similar process before you go thru this - after doing this for Fed I found out VA asks for AGI thru 4/30, 5/31, 8/31 instead of 3/31, 5/31, 8/31, so I had go thru it all again to split out April and May (which makes no sense, I don't know why can't align with Fed).

It's a bunch of work but I was able to eliminate the penalty for 2024.  For 2025 I plan to pay quarterly estimated tax based on 100% of 2024 and not have to deal with it again regardless of Roth conversions.

Not a CPA/Expert - just my 2 cents - hope this helps.

[GreenHaven]

Thank you, baldietax.  I appreciate your detailed reply and will continue to work on the details of the calculation.

I'm also in VA, so thank you for that tip about how the state breaks down the year.  I did not know that.

Coincidently, I was talking with my wife about this yesterday and we've decided to do the same as you from now on and make quarterly tax payments of 100% of our prior year's total tax owed.

[baldietax]

I was thinking more about there assignment of the adjustments such as HSA deduction and carryover losses, I didn't have the latter but I had $4150 for HSA which I contributed in Q1.  Which is similar problem to your 3k capital loss carryover, when to apply it if there are no offsetting gains.  I found this article which explains why applying it all in Q1 can be problematic, because the annualization process is then effectively multiplying that 3 months worth of AGI including both income and deductions by 4, to come up with an annualized figure for that portion - which is fine on the income side, but it is multiplying your capital loss of 3k by 4 and effectively generates a 12k capital loss which wouldn't make sense.  Similarly my HSA deduction should never exceed $4150 in each annualization.

https://www.taxact.com/support/986/2024/figuring-annualized-income-with-a-net-capital-loss?hideLayou...

Based on this it seems that for these type of deductions the best approach would be to allocate them proportionally for each period so the annualization never exceeds the limit of that deduction.  For your HSA if you paid it in Q4 I don't know if it's ok to bring it forward proportionally, rather than just leave it in Q4 which is probably the most conservative approach.

It may also not matter.  For my HSA I tried it both ways and the end result was the same because of the way the underpayment/overpayments in Q1-3 lined up with my uneven estimated taxes and I still owed $1.

This is outside of my expertise to advise one way or the other - I am just going thru the process myself but thought I'd share what I'd found.

[GreenHaven]

Thanks again, @baldietax !  I decided to cross check my federal taxes in FreeTaxUSA as I've seen that product widely recommended by others on some forums I participate in.  To my surprise, it was clearer and much more user friendly and we will likely shift over for next year.

Running my numbers again in FreeTaxUSA helped me see that what I think is going on is that the tax programs take into account the allowable annual loss (-$3,000) and HSA contributions so those are not part of what a user should enter.  In my case, for each quarter, I only need enter all income (interest, dividends), IRA distributions (Roth conversion), cumulative losses or gains incurred over each quarter, qualified dividends and a couple other things smaller items like foreign tax credit, etc.  Turbotax and FreeTaxUSA will do the rest for the calculation.

By doing this I was able to reduce my penalty to zero.

[GreenHaven]

So just an update I want to add @baldietax ...

Just something else to add about my reply below about my final conclusions/assumptions about completing form 2210 schedule AI.  I'm assuming that an HSA contribution and the annual loss allowance ($3,000) should not part of the numbers entered into Q1-Q3 because the Turbotax screen that has the quarterly entry boxes shows my total AGI from 1040 line 11 in the Q4 box and it is not editable.  Line 11 AGI already has my HSA contribution and $3K loss in the calculation so I can't imagine it should be reflected in both Q1-Q3 and Q4.

Also, when I went to adjust the Virginia "quarterly" annualized income on 760C to match the odd dates VA wants, I realized I also needed to reduce those by the amount of US government obligations earned in each "quarter".  That also reduced my VA penalty to zero.

Thanks for your help!

[baldietax · Accepted solution]

sounds good, glad you were able to resolve it all, this helped me think thru my HSA also.

yes everything gets taken into account by Q4 which is the most conservative approach for deductions, but it's cumulative view so you could bring these forward into Q1-3 within limits if there was a reason (e.g. suppose you'd had a cap gain in Q1 to offset the 3k loss) - but if you've already eliminated the penalty with the deductions in Q4 then it doesn't matter.

and yes for VA you have to layer on the timing of additions/subtractions - US Gov Obligations (subtractions), and non-VA munis (additions), as well as the different quarterly timing (so Q2 in just May?!), what a pain.

good outcome, but definitely a process worth avoiding if possible!