Dear Liz: I live totally on my investment income. I receive the majority of my income at the end of the year, mostly dividends from my brokerage account.
A couple of years ago, when talking to an IRS agent about another matter, I asked when I should make my estimated tax payment. I was told that I had to make the payments quarterly. This year, when I was talking to my accountant, she told me that I could make a lump-sum payment at the end of the year without incurring a penalty. Who is correct, the IRS agent or my accountant?
Answer: Ours is a pay-as-you-go system, and the IRS assumes that your income is received evenly throughout the year, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Therefore, the agency typically expects four estimated tax payments of roughly equal size, with the payments due April 15, June 15, Sept. 15 and Jan. 15. If the payments aren’t made as expected, you can get hit with an underpayment penalty.
However, the IRS allows a taxpayer to show that their income is not earned equally throughout the year by filing a Form 2210 with a related Schedule AI (Annualized Income Installment Method), Luscombe says. Schedule AI allows you to show when income was earned during the year so you can match your estimated payment dates to when you actually received the money.
Schedule AI is more work, since it requires you to report adjusted gross income for each of the four quarters, as well as your itemized deductions and other tax details items, Luscombe notes. But if your income comes at the end of the year and the corresponding estimated tax payment was made on Jan. 15 of the following year, filing this paperwork may be sufficient to avoid a penalty for underpaying estimated taxes, he says.
I have follow up questions to the Are IRS quarterly payments mandatory? question of May 25, 2026. We also live off of our investment income. We have a good idea of what our annual income will be most years, and make quarterly payments accordingly, of both federal and state taxes. Can quarterly payments be made early? It would be much more convenient to simply pay the two full bills annually by April 15. But, my understanding is that we would then receive a fine for not making later payments, even though we had already paid in full.
Your recent column about how to distribute estimated tax payments over the year (equal versus backend loaded) may have missed an important nuance. Your answer re the Form 2220 safe harbor is correct and would apply if the taxpayer’s income were retirement fund distributions.
As I read the query as printed in the LATimes, however, it’s possible (perhaps likely?) that the yearend distributions are from a taxable brokerage account. In that case, even absent intra-year distributions to the taxpayer, the dividends appearing in the TP’s account are deemed constructively received when paid by the portfolio companies into the brokerage account.
I can understand how an IRS agent would simply argue for equal payments. And I similarly understand that a competent accountant would know the safe harbor rules. It’s impossible to know which of them is correct here from the letter as printed.