6. Estimated Tax

Estimated tax is a method used to pay tax on income that is not subject to withholding. This income includes self-employment income, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards.

Income tax generally is withheld from pensions and annuity payments you receive. However, if the tax withheld is not enough, you may have to pay estimated tax. If you do not pay enough tax through withholding, by making estimated tax payments, or both, you may be charged a penalty.

Who Must Make Estimated Tax Payments

If you had a tax liability for 2002, you may have to pay estimated tax for 2003. Generally, you must make estimated tax payments for 2003 if you expect to owe at least $1,000 in tax for 2003 after subtracting your withholding and credits, and you expect your withholding and credits to be less than the smaller of:

• 90% of the tax to be shown on your 2003 tax return, or
• 100% of the tax shown on your 2002 tax return. The 2002 tax return must cover all 12 months.

If all of your income will be subject to income tax withholding, you probably do not need to make estimated tax payments.

For more information on estimated tax, see Publication 505.

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