Annualized Income Installment Method

DEFINITION of 'Annualized Income Installment Method'

A method through which a taxpayer may reduce or eliminate any estimated tax underpayment penalty owed. The annualized income installment method calculates the installment payment that would be due if the income minus deductions earned before the due date were annualized. This exception to the underpayment penalty gives some relief to taxpayers who receive unexpected or uneven income during the year and so cannot accurately estimate their tax liability.

BREAKING DOWN 'Annualized Income Installment Method'

The annualized method can be calculated using Internal Revenue Service (IRS) Form 2210, with additional worksheets in IRS Publication 505. The actual calculations are quite complex, so consulting a tax professional may be a good idea for many taxpayers.