1.6654-2—Exceptions to imposition of the addition to the tax in the case of individuals.
(1)
(i)
The amount which would have been required to be paid on or before the date prescribed for payment if the estimated tax were the tax shown on the return for the preceding taxable year, provided that the preceding taxable year was a year of 12 months and a return showing a liability for tax was filed for such year. However, this subparagraph shall not apply with respect to any taxable year which ends on or after September 30, 1968, for which a tax is imposed by section 51 (relating to tax surcharge), in the case of a payment of estimated tax the time prescribed for payment of which is on or after September 15, 1968.
(2)
The amount which would have been required to be paid on or before the date prescribed for payment if the estimated tax were an amount equal to a percentage of the tax computed by placing on an annual basis the taxable income for the calendar months in the taxable year ending before the month in which the installment is required to be paid. That percentage is 80 percent in the case of taxable years beginning after December 31, 1966, of individuals not referred to in section 6073(b) (relating to income from farming or fishing), 70 percent in the case of taxable years beginning before January 1, 1967, of such individuals, and 66 2/3 percent in the case of individuals referred to inferred to in section 6073(b). With respect to taxable years beginning after December 31, 1966, the adjusted self-employment income shall be taken into account in determining the amount referred to in this subparagraph if net earnings from self-employment (as defined in section 1402(a)) for the taxable year equal or exceed $400. For purposes of this subparagraph:
(1) Multiplying by 12 (or the number of months in the taxable year if less than 12) the adjusted gross income and the itemized deductions for the calendar months in the taxable year ending before the month in which the installment is required to be paid,
(2) Dividing the resulting amounts by the number of such calendar months,
(3) Increasing the amount of the annualized adjusted gross income by the unused zero bracket amount, if any, determined by reference to the annualized itemized deductions, or decreasing the amount of the annualized adjusted gross income by the excess itemized deductions, if any, determined by reference to the annualized itemized deductions (the amount resulting under this step is annualized tax table income), and
(4) Deducting from the annualized tax table income the deduction for personal exemptions (such personal exemptions being determined as of the date prescribed for payment of the installment).
If the taxpayer would be eligible to use the tax tables on the basis of annualized tax table income, the amount which would have been required to be paid for purposes of this subparagraph may be determined by applying the tax tables to annualized tax table income. the amount resulting under (3).
(1) Multiplying by 12 (or the number of months in the taxable year if less than 12) the taxable income (computed without the standard deduction and without the deduction for personal exemptions), or the adjusted gross income if the standard deduction is to be used for the calendar months in the taxable year ending before the month in which the installment is required to be paid,
(2) Dividing the resulting amount by the number of such calendar months, and
(3) Deducting from such amount the standard deduction, if applicable, and the deduction for personal exemptions (such personal exemptions being determined as of the date prescribed for payment of the installment).
(A)
The net earnings from self-employment (as defined in section 1402(a)) for the calendar months in the taxable year ending before the month in which the installment is required to be paid, computed as if such months constituted the taxable year, but not more than
(1) For taxable years beginning after 1966, $6,600
(2) For taxable years beginning after 1971, $9,000,
(3) For taxable years beginning after 1972, $10,800,
(4) For taxable years beginning after 1973, $13,200, and
(5) For taxable years beginning after 1974, an amount equal to the contribution and benefit base (as determined under section 230 of the Social Security Act) which is effective for the calendar year in which the taxable year begins, over the amount of the wages (within the meaning of section 1402(b)) for such calendar months placed on an annual basis. For this purpose, wages are annualized by multiplying by 12 (or the number of months in the taxable year in the case of a taxable year of less than 12 months) the wages for such calendar months and dividing the resulting amount by the number of such months.
(3)
An amount equal to 90 percent of the tax computed, at the rates applicable to the taxable year, on the basis of the actual taxable income for the calendar months in the taxable year ending before the month in which the installment is required to be paid, as if such months constituted the entire taxable year. For taxable years beginning after December 31, 1966, such computation shall include the tax imposed by chapter 2 on the actual self-employment income for such months. For purposes of this subparagraph, the term “actual self-employment income” means:
(i)
The net earnings from self-employment (as defined in section 1402(a) )for such calendar months, computed as if such months constituted the taxable year, but not more than
(E)
For taxable years beginning after 1974, an amount equal to the contribution and benefit base (as determined under section 230 of the Social Security Act) which is effective for the calendar year in which the taxable year begins, over the amount of wages (within the meaning of section 1402(b)) for such months.
(4)
The amount which would have been required to be paid on or before the date prescribed for payment if the estimated tax were an amount equal to a tax determined on the basis of the tax rates and the taxpayer's status with respect to personal exemptions under section 151 for the taxable year, but otherwise on the basis of the facts shown on the return for the preceding taxable year and the law applicable to such year, in the case of an individual required to file a return for such preceding taxable year.
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(i)
The tax imposed by chapter 1 of the Code (other than by section 56 ), including any qualified State individual income taxes which are treated pursuant to section 6361(a) as if they were imposed by chapter 1, plus
(ii)
For taxable years beginning after December 31, 1966, the tax imposed by chapter 2 of the Code, minus
(iii)
The credits against tax allowed by part iv, subchapter A, chapter 1 of the Code, other than the credit against tax provided by section 31 (relating to tax withheld on wages), and without reduction for any payments of estimated tax, minus
(iv)
In the case of an individual who is subject to one or more qualified State individual income taxes, the sum of the credits allowed against such taxes pursuant to section 6262(b)(2) (B) or (C) or section 6262(c)(4) and paragraph (c) of § 301.6362-4 of this chapter (Regulations on Procedure and Administration) (relating to the credit for income taxes of other States or political subdivisions thereof) and paragraph (c)(2) of § 301.6361-1 (relating to the credit for tax withheld from wages on account of qualified State individual income taxes), and minus
(v)
For taxable years ending after February 29, 1980, the individual's overpayment of windfall profit tax imposed by section 4986 of the Code for the taxable year. For this purpose, the amount of such overpayment is the sum of (A) the amount by which such individual's aggregate windfall profit tax liability for the taxable year as producer of crude oil is exceeded by withholding of windfall profit tax for the taxable year, and (B) any amount treated under section 6429 or 6430 as an overpayment of windfall profit tax for crude oil removed during the taxable year. The deemed payment date in section 4995(a)(4)(B) for the amount of windfall profit tax withheld with respect to payments for crude oil shall have no effect in the determination of the overpayment of windfall profit tax.
(i)
In the case of the exception described in paragraph (a)(1) of this section, the credits shown on the return for the preceding taxable year,
(ii)
In the case of the exceptions described in paragraph (a)(2) and (3) of this section, the credits computed under the law and rates applicable to the current taxable year, and
(iii)
In the case of the exception described in paragraph (a)(4) of this section, the credits shown on the return for the preceding taxable year, except that if the amount of any such credit would be affected by any change in rates or status with respect to personal exemptions, the credits shall be determined by reference to the rates and status applicable to the current taxable year.
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(3)
The term “return for the preceding taxable year” means the income tax return for such year which is required by section 6012(a)(1) and, in the case of taxable years beginning after December 31, 1966, the self-employment tax return for such year which is required by section 607.
(c) Examples.
The following examples illustrate the application of the exceptions to the imposition of the addition to the tax for an underpayment of estimated tax, in the case of an individual whose taxable year is the calendar year:
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(1) Net earnings from self-employment | $5,000 |
(2) $6,600 minus annualized wages ($6,600−3,000 ($2,000×12÷8)) | 3,600 |
(3) Lesser of (1) or (2) | 3,600 |
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(1) Net earnings from self-employment | $5,000 |
(2) $6,600 minus wages ($6,600−2,000) | 4,600 |
(3) Lesser of (1) or (2) | 4,600 |
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(1) Income tax: | |
Taxable income for the period ending Aug. 31, 1967 (without deduction for personal exemptions) on an annual basis ($8,700×12÷8) | $13,050.00 |
Deduction for two personal exemptions | 1,200.00 |
11,850.00 | |
Tax on $11,850 (on the basis of a joint return) | 2,227.00 |
(2) Self-employment tax: | |
Net earnings from self-employment | 6,000.00 |
Adjusted self-employment income ($6,600−4,050 annualized wages ($2,700×12÷8)) | 2,550.00 |
Tax on adjusted self-employment income ($2,550×6.4 percent) | 163.20 |
(3) Total tax ($2,227.00 163.20) | 2,390.20 |
(4) 3/4 of 80 percent of $2,390.20 | 1,434.12 |
Amount paid by Sept. 15, 1967 | 1,350.00 |
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Adjusted gross income for period ending Aug. 31, 1967 | $9,200.00 |
Adjusted gross income annualized ($9,200×12÷8) | 13,800.00 |
Taxable income annualized ($13,800 minus $1,200 for two personal exemptions and $1,000 for the standard deduction) | 11,600.00 |
Tax on $11,600 (on basis of joint return) | 2,172.00 |
Self-employment tax on adjusted self-employment income ($2,550×6.4 percent) | 163.20 |
Total tax ($2,172.00 163.20 | 2,335.20 |
3/4 of 80 percent of $2,335.20 | 1,401.12 |
Amount paid by Sept. 15, 1967 | 1,350.00 |
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Taxable income for the period ending Aug. 31, 1956 (without deduction for personal exemptions) on an annual basis ($9,400×12÷8) | $14,100.00 |
Deduction for personal exemptions | 2,400.00 |
Taxable income on an annual basis | 11,700.00 |
Tax (on the basis of a joint return) | 2,642.00 |
Dividends received for 8-month period | 2,050.00 |
Less: Amount excluded from gross income under section 116 | 50.00 |
Dividends included in gross income | 2,000.00 |
Dividend income annualized ($2,000×12÷8) | 3,000.00 |
Dividends received credit under section 34 (4 percent of $3,000) | 120.00 |
Tax less dividends received credit | 2,522.00 |
Retirement income (as defined in section 37(c)) includes: | |
Dividend income (to extent included in gross income) | 2,000.00 |
Rental income | 900.00 |
Total retirement income | 2,900.00 |
Limit on amount of retirement income under section 37(d) | 1,200.00 |
Retirement income credit under section 37 (20 percent of $1,200) | 240.00 |
Tax less credits under section 34 and section 37 | 2,282.00 |
Amount determined under the exception described in paragraph (a)(2) of this section (3/4 of 70 percent of $2,282) | 1,198.05 |
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Adjusted gross income for the period ending Aug. 31, 1977, on an annual basis ($4,000 × 12÷8) | $6,000.00 | |
Itemized deductions for the period ending Aug. 31, 1977, on an annual basis ($300 × 12÷8) | 450.00 | |
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Unused zero bracket amount computation required under sec. 63(e)(1)(D): | ||
Zero bracket amount | $2,200.00 | |
Annualized itemized deductions | 450.00 | |
Unused zero bracket amount | 1,750.00 | |
Annualized adjusted gross income | 6,000.00 | |
Plus: unused zero bracket amount | 1,750.00 | |
Annualized tax table income | 7,750.00 | |
Tax from tables | 757.00 | |
Amount specified in paragraph (a)(2) of this section (3/4 × 80 pct. × $757) | $454.20 |
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Adjusted gross income for the period ending Aug. 31, 1977, on an annual basis ($16,000 × 12÷8) | $24,000 |
Itemized deductions for the period ending Aug. 31, 1977, on an annual basis ($2,000 × 12÷8) | 3,000 |
Annualized itemized deductions | $3,000 |
Minus zero bracket amount | 2,200 |
Excess itemized deductions | 800 |
Annualized adjusted gross income | 24,000 |
Minus excess itemized deductions | 800 |
Annualized tax table income | 23,200 |
Minus: Personal exemption | 750 |
Annualized taxable income | 22,450 |
Tax under sec. 1(c) on annualized taxable income | 5,325 |
Minus: general tax credit | 180 |
Total | 5,145 |
Amount specified in paragraph (a)(2) of this section (3/4 × 80 pct. × $5,145) | 3,087 |
(d) Determination of taxable income for installment periods—
(1) In general.
In determining the applicability of the exceptions described in paragraph (a) (2) and (3) of this section, there must be an accurate determination of the amount of income and deductions for the calendar months in the taxable year preceding the installment date as of which the determination is made, that is, for the period terminating with the last day of the third, fifth, or eighth month of the taxable year. For example, a taxpayer distributes year-end bonuses to his employees but does not determine the amount of the bonuses until the last month of the taxable year. He may not deduct any portion of such year-end bonuses in determining his taxable income for any installment period other than the final installment period for the taxable year, since deductions are not allowable until paid or accrued, depending on the taxpayer's method of accounting.
(ii)
If a taxpayer on an accrual method of accounting wishes to use either of the exceptions described in paragraphs (a) (2) and (3) of this section, he must establish the amount of income and deductions for each applicable period. If his income is derived from a business in which the production, purchase, or sale of merchandise is an income-producing factor requiring the use of inventories, he will be unable to determine accurately the amount of his taxable income for the applicable period unless he can establish, with reasonable accuracy, his cost of goods sold for the applicable installment period. The cost of goods sold for such period shall be considered, unless a more exact determination is available, as such part of the cost of goods sold during the entire taxable year as the gross receipts from sales for such installment period is of gross receipts from sales for the entire taxable year.
(2) Members of partnerships.
The provisions of this subparagraph shall apply in determining the applicability of the exceptions described in paragraphs (a) (2) and (3) of this section to an underpayment of estimated tax by a taxpayer who is a member of a partnership.
(C)
Gains or losses on partnership distributions which are treated as gains or losses on sales of property.
(ii)
For purposes of determining net earnings from self-employment (for taxable years beginning after December 31, 1966) there shall be taken into account:
(A)
The partner's distributive share of income or loss, described in section 702(a)(9), subject to the special rules set forth in section 1402(a) and §§ 1.1402(a)-1 to 1.1402(a)-16, inclusive, and
(B)
The amount of any guaranteed payments under section 707(c), except for payments received from a partnership not engaged in a trade or business within the meaning of section 1402(c) and § 1.1402(c)-1.
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(iii)
The provisions of subdivision (i) (A) and (B) of this subdivision (ii) of this subparagraph may be illustrated by the following examples:
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(3) Beneficiaries of estates and trusts.
In determining the applicability of the exceptions described in paragraph (a) (2) and (3) of this section as of any installment date, the beneficiary of an estate or trust must take into account his distributable share of income from the estate or trust for the applicable period (whether or not actually distributed) if the trust or estate is required to distribute income to him currently. If the estate or trust is not required to distribute income currently, only the amounts actually distributed to the beneficiary during such period must be taken into account. If the taxable year of the beneficiary and the taxable year of the estate or trust are different, there shall be taken into account the beneficiary's distributable share of income, or the amount actually distributed to him as the case may be, during the months in the taxable year of the estate or trust ending within the taxable year of the beneficiary which precede the month in which the installment date falls. See subparagraph (2) of this paragraph for examples of a similar rule which is applied when a partner and the partnership of which he is a member have different taxable years.
(e) Special rule in case of change from joint return or separate return for the preceding taxable year—
(1) Joint return to separate returns.
In determining the applicability of the exceptions described in paragraph (a) (1) and (4) of this section to an underpayment of estimated tax, a taxpayer filing a separate return who filed a joint return for the preceding taxable year shall be subject to the following rule: The tax:
(ii)
Based on the tax rates and personal exemptions for the current taxable year but otherwise determined on the basis of the facts shown on the return for the preceding taxable year, and the law applicable to such year,
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(2) Examples.
The rule in paragraph (i) of this paragraph may be illustrated by the following examples:
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Taxable income of H for 1955 | $18,000 |
Tax on $18,000 (on basis of separate return) | 6,200 |
Taxable income of W for 1955 | 2,000 |
Tax on $2,000 (on basis of separate return) | 400 |
Aggregate tax of H and W (on basis of separate returns) | 6,600 |
Portion of 1955 tax shown on joint return attributable to H (6200/6600×5280) | 4,960 |
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Taxable income of H and W for 1955 based on additional personal exemption for 1956 | $19,400 |
Tax on 1955 income based on joint return rate for 1956 | 5,076 |
Portion of 1955 tax attributable to H (computed as in example (1) but allowing benefit of additional exemption to H) | 5900/6300 |
Portion of tax attributable to H based on tax rates and personal exemptions for 1956 but otherwise on facts on 1955 return ($5900/6300×$5,076) | $4,754 |
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Taxable income of H for 1972 | $18,000 |