How To Figure Estimated Tax

To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.

When figuring your 2001 estimated tax, it may be helpful to use your income, deductions, and credits for 2000 as a starting point. Use your 2000 federal tax return as a guide. You can use Form 1040-ES to figure your estimated tax.

You must make adjustments both for changes in your own situation and for recent changes in the tax law. For 2001, there are several changes in the law. These changes are discussed under Important Changes for 2001 at the beginning of this publication. For information about these and other changes in the law, get Publication 553, Highlights of 2000 Tax Changes, or visit the IRS Web Site at www.irs.gov.

Form 1040-ES includes a worksheet to help you figure your estimated tax. Keep the worksheet for your records. Example 2.9 illustrates the use of the worksheet. A blank worksheet appears later in this chapter.

Expected Adjusted Gross Income

Your expected adjusted gross income for 2001 (line 1 of the 2001 Estimated Tax Worksheet) is your expected total income minus your expected adjustments to income.

Total income. Include in your total income all the income you expect to receive during the year, even income that is subject to withholding. However, do not include income that is tax exempt.

Total income is all the items of income and loss that for 2000 are included in the total on line 22 of Form 1040, line 14 of Form 1040A, or line 4 of Form 1040EZ. When figuring your net earnings from self-employment, be sure to use only 92.35% of your total net profit from self-employment.

Social security and railroad retirement benefits. If you expect to receive social security or railroad retirement benefits during the year, use Worksheet 2.1 to figure the amount of expected taxable benefits you should include on line 1 of the 2001 Estimated Tax Worksheet.

Note. If you are a nonresident alien, do not use Worksheet 2.1. Instead, include 85% of your gross benefits on line 1 of the 2001 Estimated Tax Worksheet.

Adjustments to income. Be sure to subtract from your expected total income all of the adjustments you expect to take on your 2001 tax return. If you are using your 2000 return as a guide and filed Form 1040, your adjustments for 2000 were on lines 23-31a. If you filed Form 1040A, your 2000 adjustments were on lines 15 and 16.

Self-employed. If you expect to have income from self-employment, use the following worksheet to figure your expected self-employment tax. The result on line 10 of the worksheet is your deduction for one-half of your self-employment tax. Include this amount in the adjustments you subtract from your total income to arrive at your expected AGI. If you file a joint return and both you and your spouse have net earnings from self-employment, you must complete one worksheet for each of you.

Expected Taxable Income

Reduce your expected adjusted gross income for 2001 by either your expected itemized deductions or your standard deduction and by your exemptions (lines 2 through 5 of the 2001 Estimated Tax Worksheet).

Itemized deductions. If you expect to claim itemized deductions on your 2001 tax return, subtract them from your expected adjusted gross income.

Itemized deductions are the deductions that can be claimed on Schedule A of Form 1040.

Reduction of itemized deductions. For 2001, your total itemized deductions may be reduced if your adjusted gross income (AGI) is more than $132,950 ($66,475 if married filing separately). If you expect your AGI to be more than that amount, use the following worksheet to figure the amount to enter on line 2 of the 2001 Estimated Tax Worksheet.

Standard deduction. If you expect to claim the standard deduction on your 2001 tax return, subtract it from your expected adjusted gross income. Use the 2001 Standard Deduction Tables at the end of this chapter to find your standard deduction.

No standard deduction. The standard deduction for some individuals is zero. Your standard deduction will be zero if you:

1. File a separate return and your spouse itemizes deductions,
2. Are a nonresident alien, or
3. Make a return for a period of less than 12 months because you change your accounting period.

Exemptions. After you have subtracted either your expected itemized deductions or your standard deduction from your expected adjusted gross income, reduce the amount remaining by $2,900 for each exemption you expect to take on your 2001 tax return (lines 4 and 5 of the 2001 Estimated Tax Worksheet). If you can be claimed as a dependent on another person's return (such as your parent's return), you cannot claim your own personal exemption. This is true even if the other person will not claim your exemption or the exemption will be reduced or eliminated under the phaseout rule.

Phaseout. For 2001, your deduction for personal exemptions is phased out if your adjusted gross income (AGI) falls within the following brackets.

If the amount on line 1 of your 2001 Estimated Tax Worksheet is more than the highest amount in the bracket for your filing status, enter "-0-" on line 4 of your 2001 Estimated Tax Worksheet. If your AGI will fall within the bracket, use the following worksheet to figure the amount to enter on line 4 of your 2001 Estimated Tax Worksheet.

Expected Taxes and Credits

After you have figured your expected taxable income, follow the steps below to figure your expected taxes, credits, and total tax for 2001. Most people will have entries for only a few of these steps. However, you should check every step to be sure.

Blank 2001 Estimated Tax Worksheet

Step 1. Figure your expected income tax (line 6 of the 2001 Estimated Tax Worksheet). Use the 2001 Tax Rate Schedules at the end of this chapter or in the instructions to Form 1040-ES to figure your expected income tax. You must use a special method to figure tax on the income of a child under age 14 who has more than $1,400 of investment income. See Tax on Investment Income of Child Under 14 in Publication 929, Tax Rules for Children and Dependents.

Tax on net capital gain. The 31%, 36%, and 39.6% income tax rates for individuals do not apply to a net capital gain. In some cases, the 15% and 28% rates do not apply either. Instead, your net capital gain is taxed at a lower maximum rate.

The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss.

The maximum rate may be 8%, 10%, 20%, 25%, or 28%, or a combination of those rates. Use Worksheet 2.5 to figure your tax if you have capital gain.

A collectibles gain or loss is any gain or loss from the sale or exchange of a work of art, rug, antique, metal, gem, stamp, coin, or alcoholic beverage or other collectible that is a capital asset and that was held more than one year.

Step 2. Add your expected taxes (line 8 of the 2001 Estimated Tax Worksheet). Include on line 8 the sum of your tax on line 6, your expected alternative minimum tax from Form 6251 (line 41 of the 2000 Form 1040) on line 7, and expected additional taxes from Form 8814, Parents' Election To Report Child's Interest and Dividends, and Form 4972, Tax on Lump-Sum Distributions (lines 40a and 40b of the 2000 Form 1040). Also include any recapture of education credits.

Step 3. Subtract your expected credits (line 9 of the 2001 Estimated Tax Worksheet). If you are using your 2000 return as a guide and filed Form 1040, your total credits for 2000 were shown on line 50, but do not include any credit for increasing research activities. If you filed Form 1040A, your total credits for 2000 were on line 32. If your credits on line 7 of the worksheet are more than your taxes on line 6, enter "-0-" on line 8 and go on to Step 3.

Step 4. Add your expected self-employment tax (line 11 of the 2001 Estimated Tax Worksheet). You should have already figured your self-employment tax (see Expected Adjusted Gross Income earlier in this chapter).

Step 5. Add your expected other taxes (line 12 of the 2001 Estimated Tax Worksheet).

"Other taxes" are the tax on early distributions and certain other taxable distributions from IRAs (included on line 54 of the 2000 Form 1040), any advance earned income credit payments (line 55), generally any household employment taxes (line 56), and write-in amounts (line 57) other than recapture of a federal mortgage subsidy and any uncollected social security, Medicare, or railroad retirement tax.

If you filed a 2000 Form 1040A, your only "other taxes" were any advance earned income credit payments on line 34.

Step 6. Subtract your expected earned income credit, additional child tax credit, and Form 4136 fuel tax credit (line 13b of the 2001 Estimated Tax Worksheet). These are shown on lines 60a, 62, and 64 of the 2000 Form 1040. To figure your expected fuel tax credit, do not include fuel tax for the first three quarters of the year that you expect to have refunded to you. The earned income credit is shown on line 37a of the 2000 Form 1040A. The additional child tax credit is shown on line 38a of the 2000 Form 1040A.

The result of steps 1 through 6 is your total expected tax for 2001 (line 13c of the 2001 Estimated Tax Worksheet).

Required Annual Payment

You figure the total amount you must pay for 2001 through withholding and estimated tax payments on lines 14a through 14c of the 2001 Estimated Tax Worksheet.

General rule. The total amount you must pay is the smaller of:

1. 90% of your total expected tax for 2001, or
2. 100% of the total tax shown on your 2000 return. Your 2000 tax return must cover all 12 months.

Exceptions. There are exceptions to the general rule for farmers, fishermen, and certain higher income taxpayers.

Farmers and fishermen. If at least two-thirds of your gross income for 2000 or 2001 is from farming or fishing, see Farmers and Fishermen, later.

Higher income taxpayers. If your adjusted gross income (AGI) for 2000 was more than $150,000 ($75,000 if your filing status for 2001 is married filing a separate return), substitute 110% for 100% in (2) above. This rule does not apply to farmers and fishermen.

For 2000, AGI is the amount shown on Form 1040 - line 34; Form 1040A - line 19; and Form 1040EZ - line 4.

Total tax for 2000. Your 2000 total tax on Form 1040 is the amount on line 57 reduced by the total of the amounts on lines 53, 60a, and 63, any credit from Form 4136 included on line 64, any recapture of a federal mortgage subsidy and any uncollected social security, Medicare, or railroad retirement tax included on line 57, and any tax on excess contributions to IRAs and medical savings accounts, and on excess accumulations in qualified retirement plans from Form 5329 included on line 54.

On Form 1040A, it is line 35 reduced by the amounts on lines 38a and 39. On Form 1040EZ, it is line 10 reduced by line 8a.

Example 2.5. Jeremy Martin's total tax on his 2000 return was $45,000, and his expected tax for 2001 is $70,000. His 2000 AGI was $180,000. Because Jeremy had more than $150,000 of AGI in 2000, he figures his required annual payment as follows. He determines that 90% of his expected tax for 2001 is $63,000 (.90 x $70,000). Next, he determines that 110% of the tax shown on his 2000 return is $49,500. Finally, he determines that his required annual payment is $49,500, the smaller of the two.

Farmers and Fishermen

If at least two-thirds of your gross income for 2000 or 2001 is from farming or fishing, your required annual payment is the smaller of:

1. 66 2/3% (.6667) of your total tax for 2001, or
2. 100% of the total tax shown on your 2000 return. (Your 2000 tax return must cover all 12 months.)

For definitions of "gross income from farming" and "gross income from fishing," see Farmers and Fishermen later under When To Pay Estimated Tax.

Total Estimated Tax Payments

Figure the total amount you must pay for 2001 through estimated tax payments on lines 15 and 16 of the 2001 Estimated Tax Worksheet. Subtract your expected withholding from your required annual payment. You usually must pay this difference in four equal installments. (See When To Pay Estimated Tax and How To Figure Each Payment, later.)

If your total expected tax on line 13c, minus your expected withholding on line 15, is less than $1,000, you do not need to make estimated tax payments.

Withholding. Your expected withholding for 2001 includes the income tax you expect to be withheld from all sources (wages, pensions and annuities, etc.). It also includes excess social security and railroad retirement tax you expect to be withheld from your wages.

For this purpose, you will have excess social security or tier 1 railroad retirement tax withholding for 2001 only if your wages from two or more employers are more than $80,400.

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