How to use the Annualized Income Installment Method with free tax USA

opendoor

Hi!

Have not yet paid any quarterly taxes for 2025 and am looking at how to lower the underpayment penalty. For Q1-Q3, my income was around $40,000. For Q4, my income was $30,000. Would like to pay the quarterly tax for Q4 before the January 15th deadline and minimize the underpayment penalty for the year. Does freetax have a way of using the Annualized Income Installment Method so that the IRS knows that my income was made unevenly throughout the year? How does one use that function in the program? Thank you!!!

KristineS

Hi opendoor,

Thanks for writing in with your question.

Yes, FreeTaxUSA software allows for the annualized income method.

However, you may be confusing two things.

First, we have a pay as you go system in the U.S., and quarterly estimated tax payments are required for self-employed individuals. Those due dates are April 15th, June 15th, September 15th, and January 15th of the following year. Making a single, 4th quarter estimated tax payment on or before January 15th for income that was earned throughout the year is generally not as helpful as it would have been if quarterly payments were made on time. It may or may not minimize the underpayment penalty. Wage earners, those with large capital gains, or other types of income can also make voluntary estimated tax payments for a large amount of income received in a particular quarter.

Second, although we can't guarantee how the IRS processes your return because all facts and circumstances matter, you can use the 'annualized income installment method' to see if this method will be beneficial for you in mitigating additional penalties. It's generally most beneficial when taxpayers have more income at the end of the year.

The prompt for this shows up on the 'Do you qualify for any exceptions?' screen when using the Underpayment Penalty (Form 2210) in the MISC section of our program. Currently, the full version of the 2025 software has not yet been released so this isn't yet available.

You might like to create a dummy account in our 2024 software to walk through the steps to get an idea of how this works. Different tax rules apply for 2025, but working through this scenario in 2024 will give you a sense of things. You'll see the annualized portion shows up on Parts I and II of Form 2210, which you'll be able to 'View' on the Underpayment Summary screen after entering all relevant information.