Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or by making estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period (see When To Pay Estimated Tax, later), you may be charged a penalty even if you are due a refund when you file your tax return. For information on when the penalty applies, see Underpayment Penalty, later.

Who Must Make Estimated Tax Payments?

If you had a tax liability for 2001, you may have to pay estimated tax for 2002.

Figure 5-A Do You Have To Pay Estimated Tax?

General rule. You must make estimated tax payments for 2002 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2002 after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of:

• 90% of the tax to be shown on your 2002 tax return, or
• 100% of the tax shown on your 2001 tax return. Your 2001 tax return must cover all 12 months.

Special rules for farmers, fishermen, and higher income taxpayers. There are exceptions to the general rule for farmers, fishermen, and certain higher income taxpayers. See Figure 5-A and chapter 2 of Publication 505 for more information.

Aliens. Resident and nonresident aliens may also have to make estimated tax payments. Resident aliens should follow the rules in this chapter unless noted otherwise. Nonresident aliens should get Form 1040-ES(NR), U.S. Estimated Tax for Nonresident Alien Individuals.

Avoiding estimated tax. If you receive salaries or wages, you can avoid having to make estimated tax payments by asking your employer to take more tax out of your earnings. To do this, file a new Form W-4 with your employer.

Estimated payments not required. You do not have to pay estimated tax for 2002 if you meet all three of the following conditions:

1. You had no tax liability for 2001.
2. You were a U.S. citizen or resident for the whole year.
3. Your 2001 tax year covered a 12-month period.

You had no tax liability for 2001 if your total tax was zero or you did not have to file an income tax return.

Married taxpayers. To figure whether you must make estimated tax payments, apply the rules discussed here to your separate estimated income. If you can make joint estimated tax payments, you can apply these rules on a joint basis.

You and your spouse can make joint estimated tax payments even if you are not living together.

You and your spouse cannot make joint estimated tax payments if:

1. You are legally separated under a decree of divorce or separate maintenance,
2. Either spouse is a nonresident alien, or
3. You and your spouse have different tax years.

Whether you and your spouse make joint estimated tax payments or separate payments will not affect your choice of filing a joint tax return or separate returns for 2002.

2001 separate returns and 2002 joint return. If you plan to file a joint return with your spouse for 2002, but you filed separate returns for 2001, your 2001 tax is the total of the tax shown on your separate returns. You filed a separate return if you filed as single, head of household, or married filing separately.

2001 joint return and 2002 separate returns. If you plan to file a separate return for 2002, but you filed a joint return for 2001, your 2001 tax is your share of the tax on the joint return. You file a separate return if you file as single, head of household, or married filing separately. To figure your share of the tax on the jooint return, first figure the tax both you and your spouse would have paid had you filed separate returns for 2001 using the same filing status as for 2002. Then multiply the tax on the joint return by the following fraction:

Example. Joe and Heather filed a joint return for 2001 showing taxable income of $48,000 and a tax of $7,557. Of the $48,000 taxable income, $40,000 was Joe's and the rest was Heather's. For 2002, they plan to file married filing separately. Joe figures his share of the tax on the 2001 joint return as follows:

Tax on $40,000 based on a separate  return	$ 8,172
Tax on $8,000 based on a separate  return	1,204
Total	$ 9,376
Joe's percentage of total ($8,172 × $9,376)	87%
Joe's share of tax on joint return  ($7,557 × 87%)	$ 6,574

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 2002 estimated tax, it may be helpful to use your income, deductions, and credits for 2001 as a starting point. Use your 2001 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 2002, there are several changes in the law. These changes are discussed in Publication 553, Highlights of 2001 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.

For more complete information and examples of how to figure your estimated tax for 2002, see chapter 2 of Publication 505.

When To Pay Estimated Tax

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return. The following chart gives the payment periods and due dates for estimated tax payments.

For the period:	Due date:
Jan. 1* through Mar. 31	April 15
April 1 through May 31	June 15
June 1 through Aug. 31	September 15
Sept. 1 through Dec. 31	January 15 next year**
*If your tax year does not begin on January 1, see Fiscal year taxpayers, later.
**See January payment, later.

Saturday, Sunday, holiday rule. If the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or legal holiday. For example, a payment due Saturday, June 15, 2002, will be on time if you make it by Monday, June 17, 2002.

January payment. If you file your 2002 Form 1040 or Form 1040A by January 31, 2003, and pay the rest of the tax you owe, you do not need to make your estimated tax payment that would be due on January 15, 2003.

Fiscal year taxpayers. If your tax year does not start on January 1, see the Form 1040-ES instructions for your payment due dates.

When To Start

You do not have to make estimated tax payments until you have income on which you will owe the tax. If you have income subject to estimated tax during the first payment period, you must make your first payment by the due date for the first payment period. You can pay all your estimated tax at that time, or you can pay it in installments. If you choose to pay in installments, make your first payment by the due date for the first payment period. Make your remaining installment payments by the due dates for the later periods.

No income subject to estimated tax during first period. If you first have income subject to estimated tax during a later payment period, you must make your first payment by the due date for that period. You can pay your entire estimated tax by the due date for that period, or you can pay it in installments by the due date for that period and the due dates for the remaining periods. The following chart shows when to make installment payments.

If you first have income on which you must pay estimated tax:		Make a payment by:		Make later installments by:
Before Apr. 1		Apr. 15		June 15 Sep. 15 Jan. 15 next year*
After Mar. 31 and before June 1		June 15		Sep. 15 Jan. 15 next year*
After May 31 and before Sep. 1		Sep. 15		Jan. 15 next year*
After Aug. 31		Jan. 15 next year*		(None)
*See January payment, and Saturday, Sunday, holiday rule under When To Pay Estimated Tax, earlier.

Change in estimated tax. After making your first estimated tax payment, changes in your income, adjustments, deductions, credits, or exemptions may make it necessary for you to refigure your estimated tax. Pay the unpaid balance of your amended estimated tax by the next payment due date after the change or in installments by that date and the due dates for the remaining payment periods.

How much to pay to avoid a penalty. To determine how much you should pay by each payment due date, see How To Figure Each Payment, next. If the earlier discussions of No income subject to estimated tax during first period or Change in estimated tax apply to you, you may need to read Annualized Income Installment Method in Publication 505, for information on how to avoid a penalty.

How To Figure Each Payment

You should pay enough estimated tax by the due date of each payment period to avoid a penalty for that period. You can figure your required payment for each period by using either the regular installment method or the annualized income installment method. These methods are described in Publication 505. If you do not pay enough each payment period, you may be charged a penalty even if you are due a refund when you file your tax return.

File Form 2210 to avoid a penalty. If your estimated tax payment for a previous period is less than one-fourth of your amended estimated tax, you may be charged a penalty for underpayment of estimated tax for that period when you file your tax return. To avoid the penalty, you must file Form 2210 with your 2002 tax return. You must also show that the total of your withholding and estimated tax payment for the period was at least as much as your annualized income installment. See chapter 4 of Publication 505 for more information.

Estimated Tax Payments Not Required

You do not have to make estimated tax payments if your withholding in each payment period is at least one-fourth of your required annual payment or at least your required annualized income installment for that period. You also do not have to make estimated tax payments if you will pay enough through withholding to keep the amount you owe with your return under $1,000.

How To Pay Estimated Tax

There are five ways to pay estimated tax.

1. By crediting an overpayment on your 2001 return to your 2002 estimated tax.
2. By sending in your payment with a payment-voucher from Form 1040-ES.
3. By paying electronically using the Electronic Federal Tax Payment System (EFTPS).
4. By direct debit if you are filing Form 1040 or Form 1040A electronically.
5. By credit card using a pay-by-phone system.

Crediting an Overpayment

When you file your Form 1040 or Form 1040A for 2001 and you have an overpayment of tax, you can apply part or all of it to your estimated tax for 2002. On line 69 of Form 1040, or line 44 of Form 1040A, write the amount you want credited to your estimated tax rather than refunded. The amount you have credited should be taken into account when figuring your estimated tax payments.

You can use all the credited amount toward your first payment, or you can spread it out in any way you choose among any or all of your payments.

If you ask that an overpayment be credited to your estimated tax for the next year, the payment is considered to have been made on the due date of the first estimated tax installment (April 15 for calendar year taxpayers). You cannot have any of that amount refunded to you after that due date until the close of that tax year. You also cannot use that overpayment in any other way after that date.

Using the Payment-Vouchers

Each payment of estimated tax must be accompanied by a payment-voucher from Form 1040-ES. If you made estimated tax payments last year, you should receive a copy of the 2002 Form 1040-ES in the mail. It will have payment-vouchers preprinted with your name, address, and social security number. Using the preprinted vouchers will speed processing, reduce the chance of error, and help save processing costs.

If you did not pay estimated tax last year, you will have to get a copy of Form 1040-ES from the IRS. After you make your first payment, a Form 1040-ES package with the preprinted vouchers will be mailed to you. Follow the instructions in the package to make sure you use the vouchers correctly.

Use the window envelopes that came with your Form 1040-ES package. If you use your own envelope, make sure you mail your payment-vouchers to the address shown in the Form 1040-ES instructions for the place where you live.

Do not use the address shown in the Form 1040 or Form 1040A instructions.

If you file a joint return and you are making joint estimated tax payments, please enter the names and social security numbers on the payment voucher in the same order as they will appear on the joint return.

Change of address. You must notify the IRS if you are making estimated tax payments and you changed your address during the year. You must send a clear and concise written statement to the IRS Service Center where you filed your last return and provide all of the following:

• Your full name (and your spouse's full name),
• Your signature (and spouse's signature),
• Your old address (and spouse's old address if different),
• Your new address, and
• Your social security number (and spouse's social security number).

You can use Form 8822, Change of Address, for this purpose.

You can continue to use your old preprinted payment-vouchers until the IRS sends you new ones. However, do not correct the address on the old voucher.

Payment by Direct Debit or Credit Card

If you want to make estimated payments by direct debit or by credit card, see the Form 1040-ES instructions or How To Pay Estimated Tax in Publication 505.

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