Required Annual Payment

You figure the total amount you must pay for 2002 through withholding and estimated tax payments on lines 14a through 14c of the 2002 Estimated Tax Worksheet.

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

1. 90% of your total expected tax for 2002, or
2. 100% of the total tax shown on your 2001 return. Your 2001 tax return must cover all 12 months.

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

Higher income taxpayers.   If your adjusted gross income (AGI) for 2001 was more than $150,000 ($75,000 if your filing status for 2002 is married filing a separate return), substitute 112% for 100% in (2) above. This rule does not apply to farmers and fishermen.

For 2001, AGI is the amount shown on Form 1040 - line 34; Form 1040A - line 20; and Form 1040EZ - line 4.

Farmers and fishermen.    If at least two-thirds of your gross income for 2001 or 2002 is from farming or fishing, your required annual payment is the smaller of:

1. 662/3% (.6667) of your total tax for 2002, or
2. 100% of the total tax shown on your 2001 return. (Your 2001 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 tax for 2001.   Your 2001 total tax on Form 1040 is the amount on line 58 reduced by the total of the amounts on lines 54, 61a, and 63, any credit from Form 4136 included on line 65, any recapture of a federal mortgage subsidy and any uncollected social security, Medicare, or railroad retirement tax included on line 58, 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 55.

On Form 1040A, it is line 36 reduced by the amounts on lines 39a and 40. On Form 1040EZ, it is line 11 reduced by line 9a.

Example 2.5.   Jeremy Martin's total tax on his 2001 return was $45,000, and his expected tax for 2002 is $70,000. His 2001 AGI was $180,000. Because Jeremy had more than $150,000 of AGI in 2001, he figures his required annual payment as follows. He determines that 90% of his expected tax for 2002 is $63,000 (.90 × $70,000). Next, he determines that 112% of the tax shown on his 2001 return is $50,400. Finally, he determines that his required annual payment is $50,400, the smaller of the two.

Total Estimated Tax Payments

Figure the total amount you must pay for 2002 through estimated tax payments on lines 15 and 16 of the 2002 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 2002 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 2002 only if your wages from two or more employers are more than $84,900.

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.

Table 2.3

For the period:	Due date:
Jan. 1* through March 31	April 15
April 1 through May 31	June 15
June 1 through August 31	September 15
Sept. 1 through Dec. 31	Jan. 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.

Example 2.6.   Janet Adams does not pay any estimated tax due for 2002. She files her 2002 income tax return and pays the balance due as shown on her return on January 24, 2003.

Janet's estimated tax for the fourth payment period is considered to have been paid on time. However, she may owe a penalty for not making the first three estimated tax payments. Any penalty for not making those payments will be figured up to January 24, 2003.

Fiscal year taxpayers.   If your tax year does not start on January 1, your payment due dates are:

1. The 15th day of the 4th month of your fiscal year,
2. The 15th day of the 6th month of your fiscal year,
3. The 15th day of the 9th month of your fiscal year, and
4. The 15th day of the 1st month after the end of your fiscal year.

You do not have to make the last payment listed above if you file your income tax return by the last day of the first month after the end of your fiscal year and pay all the tax you owe with your return.

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 the dates for making installment payments.

Table 2.4

If you first have income on which you must pay estimated tax:	Make a payment by:	Make later in- stallments by:
Before April 1	April 15	June 15
		September 15
		January 15 next year*
After March 31 and before June 1	June 15	September 15
		January 15 next year*
After May 31 and before Sept. 1	September 15	January 15 next year*
After August 31	January 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 penalty.   To determine how much you should pay by each payment due date, see How To Figure Each Payment, later. 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 the explanation of the Annualized Income Installment Method, later, to avoid a penalty.

Farmers and Fishermen

If at least two-thirds of your gross income for 2001 or 2002 is from farming or fishing, you have only one payment due date for your 2002 estimated tax - January 15, 2003. The due dates for the first three payment periods, discussed earlier under When To Pay Estimated Tax, do not apply to you.

If you file your 2002 Form 1040 by March 1, 2003, and pay all the tax you owe, you do not need to pay estimated tax.

Joint returns.   On a joint return, you must add your spouse's gross income to your gross income to determine if at least two-thirds of your total gross income is from farming or fishing.

Gross income.   Your gross income is all income you receive in the form of money, goods, property, and services that is not exempt from tax. To determine whether two-thirds of your gross income for 2001 was from farming or fishing, use as your gross income the total of the income (not loss) amounts shown in the following locations.

1. Form 1040, lines 7, 8a, 9, 10, 11, 15b, 16b, 19, 20b, and 21.
2. Schedule C (Form 1040), line 7.
3. Schedule C-EZ (Form 1040), line 1.
4. Schedule D (Form 1040), line 1, column f (gains only), and lines 8 and 13, column f (gains only).
5. Schedule D-1 (Form 1040), line 1, column f (gains only), and line 8, column f (gains only).
6. Schedule E (Form 1040), lines 3, 4, 31, 36, and 38.
7. Schedule F (Form 1040), line 11.
8. Form 2439, Box 1a.
9. Form 4684, lines 15 and 36 (gains only).
10. Form 4797, line 2, column g (gains only), and line 6 (gains only).
11. Form 6252, line 26 or line 37 (gains only).
12. Form 6781, line 8 (gain only) and line 9 (gain only).
13. Form 8824, line 22 (unless the installment method applies).
14. Form 4835, line 7.
15. Schedule K-1 (Form 1065), lines 15b and 15c (less any partnership amounts included in (1) through (14)).

Also add your pro rata share of S corporation gross income (less any S corporation amounts included in (1) through (14)).

Gross income from farming.   This is income from cultivating the soil or raising agricultural commodities. It includes the following amounts.

1. Income from operating a stock, dairy, poultry, bee, fruit, or truck farm.
2. Income from a plantation, ranch, nursery, range, orchard, or oyster bed.
3. Crop shares for the use of your land.
4. Gains from sales of draft, breeding, dairy, or sporting livestock.

For 2001, gross income from farming is the total of the amounts from:

1. Line 11 of Schedule F (Form 1040), Profit or Loss From Farming,
2. Line 7 of Form 4835, Farm Rental Income and Expenses,
3. Your share of a partnership's or S corporation's gross income from farming,
4. Your share of distributable net income from farming of an estate or trust,
5. Your gains from sales of draft, breeding, dairy, or sporting livestock shown on Form 4797, Sales of Business Property.

Wages you receive as a farm employee and wages you receive from a farm corporation are not gross income from farming.

Gross income from fishing.   This is income from catching, taking, harvesting, cultivating, or farming any kind of fish, shellfish (for example, clams and mussels), crustaceans (for example, lobsters, crabs, and shrimp), sponges, seaweeds, or other aquatic forms of animal and vegetable life.

Gross income from fishing includes the following amounts.

1. Income for services as an officer or crew member of a vessel while the vessel is engaged in fishing.
2. Your share of a partnership's or S corporation's gross income from fishing.
3. Income for services normally performed in connection with fishing.

Services normally performed in connection with fishing include:

• Shore service as an officer or crew member of a vessel engaged in fishing, and
• Services that are necessary for the immediate preservation of the catch, such as cleaning, icing, and packing the catch.

Fiscal year farmers and fishermen.   If you are a farmer or fisherman, but your tax year does not start on January 1, you can either:

1. Pay all your estimated tax by the 15th day after the end of your tax year, or
2. File your return and pay all the tax you owe by the 1st day of the 3rd month after the end of your tax year.

How To Figure Each Payment

After you have figured your estimated tax, figure how much you must pay by the due date of each payment period. You should pay enough by each due date to avoid a penalty for that period. If you do not pay enough during any payment period, you may be charged a penalty even if you are due a refund when you file your tax return. The penalty is discussed in chapter 4.

Regular Installment Method

If your first estimated tax payment is due April 15, 2002, you can figure your required payment for each period by dividing your annual estimated tax due (line 16 of the 2001 Estimated Tax Worksheet) by 4. Use this method only if your income is basically the same throughout the year.

If you do not receive your income evenly throughout the year, your required estimated tax payments may not be the same for each period. See Annualized Income Installment Method, later.

Amended estimated tax. If you refigure your estimated tax during the year, or if your first estimated tax payment is due after April 15, 2002, figure your required payment for each remaining payment period using the following worksheet.

Worksheet 2.6

1.	Amended total estimated tax due
2.	Multiply line 1 by:
	.50 if next payment is due June 17, 2002
	.75 if next payment is due September 16, 2002
	1.00 if next payment is due January 15, 2003
3.	Estimated tax payments for all previous periods
4.	Next required payment: Subtract line 3 from line 2 and enter the result (but not less than zero) here and on your payment-voucher for your next required payment
	If the payment on line 4 is due January 15, 2003, stop here. Otherwise, go on to line 5.
5.	Add lines 3 and 4
6.	Subtract line 5 from line 1 and enter the result (but not less than zero)
7.	Each following required payment: If the payment on line 4 is due June 17, 2002, enter one-half of the amount on line 6 here and on the payment-vouchers for your payments due September 16, 2002, and January 15, 2003. If the amount on line 4 is due September 16, 2002, enter the full amount on line 6 here and on the payment-voucher for your payment due January 15, 2003

Example 2.7.   Early in 2002, Mira figures her estimated tax due is $1,800. She makes estimated tax payments on April 15 and June 17 of $450 each ($1,800 ÷ 4).

On July 10, she sells investment property at a gain. Her refigured estimated tax is $4,100. Her required estimated tax payment for the third payment period is $2,175, figured as follows.

Filled-in Worksheet 2.6 for Mira (Example 2.7)

1.	Amended total estimated tax due		$4,100
2.	Multiply line 1 by:
	.50 if next payment is due June 17, 2002
	.75 if next payment is due September 16, 2002
	1.00 if next payment is due January 15, 2003		3,075
3.	Estimated tax payments for all previous periods		900
4.	Next required payment: Subtract line 3 from line 2 and enter the result (but not less than zero) here and on your payment-voucher for your next required payment		$2,175
If the payment on line 4 is due January 15, 2003, stop here. Otherwise, go on to line 5.
5.	Add lines 3 and 4		3,075
6.	Subtract line 5 from line 1 and enter the result (but not less than zero)		1,025
7.	Each following required payment: If the payment on line 4 is due June 17, 2002, enter one-half of the amount on line 6 here and on the payment-vouchers for your payments due September 16, 2002, and January 15, 2003. If the amount on line 4 is due September 16, 2002, enter the full amount on line 6 here and on the payment-voucher for your payment due January 15, 2003		$1,025

Underpayment 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. See chapter 4 for more information.

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