This section summarizes important changes that could affect your estimated tax payments for 2008.

Earned income credit (EIC). You may be able to take the EIC if:

The maximum investment income you can have and still get the credit has increased to $2,950. For more information, see Publication 596, Earned Income Credit (EIC).

Retirement savings plans. . The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs). Traditional IRA deduction limits increased. You and your spouse, if filing jointly, each may be able to deduct up to $5,000 ($6,000 if age 50 or older at the end of the year). You may be able to take an IRA deduction if you were covered by a retirement plan at work and your 2008 modified adjusted gross income (AGI) is less than $63,000 ($105,000 if married filing jointly or a qualifying widow(er)). Retirement savings contributions credit (saver's credit). For 2008, the income limits have increased and you may be able to claim this credit if your modified AGI is not more than $26,500 ($53,000 if married filing jointly, $39,750 if head of household).

Personal exemption and itemized deduction phaseouts reduced. The amount by which these deductions are reduced in 2008 will be one-half of the reduction that applied in 2007.

Standard mileage rates.  Beginning in 2008, the standard mileage rate for the cost of operating your car is:

Tax on child's investment income. .  Form 8615 will be required to figure the tax for the following children with investment income of more than $1,800.

The election to report a child's investment income on a parent's return and the special rule for when a child must file Form 6251, Alternative Minimum Tax—Individuals, also will apply to the children listed above.

Forgiveness of mortgage debt. . You may be able to exclude from income part or all of the mortgage debt forgiven on your principal residence. This applies for debt forgiven in 2007 through 2009. See Publication 553, Highlights of 2007 Tax Changes, for more details.

Volunteer firefighters and emergency medical responders. . Certain qualified payments and other State and local tax benefits are not included in taxable income. For more information, see Publication 553.

Special rule for sales of principal residences by surviving spouses. . A surviving spouse who sells his or her principal residence within 2 years after the spouse's date of death may be allowed to exclude up to $500,000 of qualified gain instead of $250,000. See Publication 553 for more information.

Capital gain tax rate reduced. . The 5% capital gain tax rate is reduced to zero.

Extended tax benefits. . The deduction for qualified mortgage insurance premiums was extended through 2010.

Expiring tax benefits. 

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 tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. If you do not pay enough by the due date of each payment period (see When To Pay Estimated Tax on page 23), 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 chapter 4.

If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to take more tax out of your earnings. To do this, file a new Form W-4 with your employer. See chapter 1.

If you owed additional tax for 2007, you may have to pay estimated tax for 2008.

General Rule

You must pay estimated tax for 2008 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2008, after subtracting your withholding and credits.

2. You expect your withholding and credits to be less than the smaller of:

   1. 90% of the tax to be shown on your 2008 tax return, or

   2. 100% of the tax shown on your 2007 tax return. Your 2007 tax return must cover all 12 months.

Note. These percentages may be different if you are a farmer, fisherman, or higher income taxpayer. See Special Rules on the next page.

You may find Figure 2-A below helpful in determining if you must pay estimated tax.

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

Example 1.

To figure whether she should pay estimated tax for 2008, Jane, who files as head of household, uses Figure 2-A and the following information.

Expected AGI for 2008	$79,800
AGI for 2007	$73,700
Tax shown on 2007 return	$  9,944
Tax expected to be shown on 2008 return	$11,263
Tax expected to be withheld in 2008	$10,200

Jane's answer to the chart's first question is YES; she expects to owe at least $1,000 for 2008 after subtracting her withholding from her expected tax ($11,263 - $10,200 = $1,063). Her answer to the chart's second question is also YES; she expects her income tax withholding ($10,200) to be at least 90% of the tax to be shown on her 2008 return ($11,263 × 90% = $10,137). Jane does not need to pay estimated tax.

Example 2.

The facts are the same as in Example 1, except that Jane expects only $8,500 tax to be withheld in 2008. Because that is less than $10,137, her answer to the chart's second question is NO.

Jane's answer to the chart's third question is also NO; she does not expect her income tax withholding ($8,500) to be at least 100% of the tax shown on her 2007 return ($9,944). Jane must pay estimated tax for 2008.

Example 3.

The facts are the same as in Example 2, except that the tax shown on Jane's 2007 return was $8,000. Because she expects to have more than $8,000 withheld in 2008 ($8,500), her answer to the chart's third question is YES. Jane does not need to pay estimated tax for 2008.

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Figure 2-A: Do You Have To Pay Estimated Tax?

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

When figuring your 2008 estimated tax, it may be helpful to use your income, deductions, and credits for 2007 as a starting point. Use your 2007 federal tax return as a guide. You can use Form 1040-ES to figure your estimated tax. Nonresident aliens use Form 1040-ES (NR) to figure estimated tax.

You must make adjustments both for changes in your own situation and for recent changes in the tax law. For 2008, there are several changes in the law. Some of these changes are discussed under What's New for 2008 at the beginning of this chapter. For information about these and other changes in the law, get Publication 553 or visit the IRS website at www.irs.gov.

The instructions for Form 1040-ES include a worksheet to help you figure your estimated tax. Keep the worksheet for your records.

2008 Estimated Tax Worksheet

Use the worksheet (Figure 2-B) above to help guide you through the information about completing the 2008 Estimated Tax Worksheet. You also will find a blank worksheet on page 33.

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Fig. 2-B. 2008 Estimated Tax Worksheet

Expected AGI—Line 1

Your expected AGI for 2008 (line 1) 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 includes all income and loss for 2008 that, if you had received it in 2007, would have been included on your 2007 tax return in the total on line 22 of Form 1040, line 15 of Form 1040A, or line 4 of Form 1040EZ.

Social security and railroad retirement benefits. If you expect to receive social security or tier 1 railroad retirement benefits during 2008, use Worksheet 2-1 on page 34 to figure the amount of expected taxable benefits you should include on line 1.

Adjustments to income.   Be sure to subtract from your expected total income all of the adjustments you expect to take on your 2008 tax return. If you are using your 2007 return as a guide and filed Form 1040, your adjustments for 2007 were on lines 23-35, plus any write-in adjustments on line 36. If you filed Form 1040A, your 2007 adjustments were on lines 16-19.

Self-employed. If you expect to have income from self-employment, use Worksheet 2-2 on page 34 to figure your expected self-employment tax and your deduction for one-half of your self-employment tax. Include the amount from line 10 of Worksheet 2-2 in your expected adjustments to income. If you file a joint return and both you and your spouse have net earnings from self-employment, each of you must complete a separate worksheet.

Expected Taxable Income— Lines 2-5

Reduce your expected AGI for 2008 (line 1) by either your expected itemized deductions or your standard deduction and by your exemptions (lines 2 through 5).

Itemized deductions—line 2.   If you expect to claim itemized deductions on your 2008 tax return, subtract the estimated amount from your expected AGI.

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

Phaseout of itemized deductions. For 2008, your total itemized deductions may be reduced if your AGI is more than $159,950 ($79,975 if married filing separately). If you expect your AGI to be more than that amount, use Worksheet 2-3 on page 35 to figure the amount to enter on line 2.

Standard deduction—line 2.   If you expect to claim the standard deduction on your 2008 tax return, subtract it from your expected AGI. Use the 2008 Standard Deduction Tables on page 43 to find your standard deduction.

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

• File a separate return and your spouse itemizes deductions,

• Are a dual-status alien, or

• File a return for a period of less than 12 months because you change your accounting period.

Exemptions—line 4.   After you have subtracted either your expected itemized deductions or your standard deduction from your expected AGI, reduce the amount remaining by $3,500 for each exemption you expect to take on your 2008 tax return. If another person (such as your parent) can claim an exemption for you on his or her tax 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.

Reduction of personal exemption amount. For 2008, your deduction for personal exemptions is reduced if your AGI is larger than the AGI shown below for your filing status.

Single	$159,950
Married filing jointly or qualifying widow(er)	$239,950
Married filing separately	$119,975
Head of household	$199,950

If you expect your AGI to be more than that amount, use Worksheet 2-4 on page 35 to figure the amount to enter on line 4.

Expected Taxes and Credits—Lines 6-13c

After you have figured your expected taxable income (line 5), follow the steps below to figure your expected taxes, credits, and total tax for 2008. Most people will have entries for only a few of these steps. However, you should check every step to be sure you do not overlook anything.

Step 1.   Figure your expected income tax (line 6). Generally, you will use the 2008 Tax Rate Schedules, found on page 40 or in the instructions to Form 1040-ES, to figure your expected income tax. However, see below for situations where you must use a different method to compute your estimated tax.

Tax on child's investment income.   You must use a special method to figure tax on the income of the following children who have more than $1,800 of investment income.

1. Children under age 18 at the end of 2008.

2. The following children if their earned income is not more than half their support.

   1. Children age 18 at the end of 2008.

   2. Children over age 18 and under age 24 at the end of 2008 who are full-time students.

See Publication 929, Tax Rules for Children and Dependents. Although the ages and dollar amounts in the publication will be different in the 2008 revision, this reference will give you basic information for figuring the tax.

Tax on net capital gain.   The regular income tax rates for individuals do not apply to a net capital gain. 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.

Tax on qualified dividends.   The maximum tax rate for qualified dividends is 15% (generally, 0% for people whose other income is taxed at the 10% or 15% rate).

Tax on capital gain and qualified dividends. If you expect to have a net capital gain or qualified dividends, use Worksheet 2-5 on page 36 to figure your tax.

Tax if excluding foreign earned income or housing. If you expect to claim the foreign earned income exclusion or the housing exclusion on Form 2555 or Form 2555-EZ, use Worksheet 2-6 on page 37 to figure your estimated tax.

Step 2.   Total your expected taxes (line 8). Include on line 8 the sum of:

1. Your tax on line 6;

2. Your expected alternative minimum tax (AMT) from Form 6251 (or included on Form 1040A, line 28) on line 7;

3. Your expected additional taxes from Form 8814, Parents' Election To Report Child's Interest and Dividends, and Form 4972, Tax on Lump-Sum Distributions (line 44, boxes a and b, of the 2007 Form 1040); and

4. Any recapture of education credits.

Step 3.   Subtract your expected credits (line 9). If you are using your 2007 return as a guide and filed Form 1040, your total credits for 2007 were shown on line 56. If you filed Form 1040A, your total credits for 2007 were on line 34.

  If your credits on line 9 are more than your taxes on line 8, enter “-0-” on line 10 and go to Step 4.

Step 4.   Add your expected self-employment tax (line 11). You already should have figured your self-employment tax (see Self-employed under Expected AGI—Line 1 on page 21).

Step 5.   Add your expected other taxes (line 12).

  Other taxes include:

1. Taxes on early distributions from:

   1. An IRA or other qualified plan,

   2. An annuity, or

   3. A modified endowment contract entered into after June 20, 1988;

2. Advance earned income credit payments;

3. Household employment taxes (before subtracting advance EIC payments made to your employee(s)) if:

   1. You will have federal income tax withheld from wages, pensions, annuities, gambling winnings, or other income, or

   2. You would be required to make estimated tax payments even if you did not include household employment taxes when figuring your estimated tax; and

4. Amounts written in on Form 1040, line 63. But, do not include tax on recapture of a federal mortgage subsidy, tax on golden parachute payments, excise tax on insider stock compensation from an expatriated corporation, or uncollected employee social security, Medicare, or RRTA tax on tips or group-term life insurance.

  If you filed a 2007 Form 1040A, your only other tax was any advance earned income credit payments on line 36.

Step 6.   Subtract your expected earned income credit, additional child tax credit, Form 4136 fuel tax credit, Form 8885 health coverage tax credit, and Form 8801 (line 27) refundable credit for prior year minimum tax (line 13b). These are shown on the 2007 Form 1040, lines 66a, 68, 70b, 70c, and 71.

  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 the 2007 Form 1040A, line 40a, and the additional child tax credit is shown on line 41.

  The result of steps 1 through 6 is your total estimated tax for 2008 (line 13c).

Required Annual Payment— Line 14c

On lines 14a through 14c, figure the total amount you must pay for 2008, through withholding and estimated tax payments, to avoid paying a penalty.

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

1. 90% of your total expected tax for 2008, or

2. 100% of the total tax shown on your 2007 return. Your 2007 tax return must cover all 12 months.

Special rules.   There are special rules for certain higher income taxpayers and for farmers and fishermen.

Higher income taxpayers.   If your AGI for 2007 was more than $150,000 ($75,000 if your filing status for 2008 is married filing separately), substitute 110% for 100% in (2) above. This rule does not apply to farmers and fishermen.

For 2007, AGI is the amount shown on Form 1040, line 37; Form 1040A, line 21; and Form 1040EZ, line 4.

Example.   Jeremy Martin's total tax on his 2007 return was $42,581, and his expected tax for 2008 is $71,253. His 2007 AGI was $180,000. Because Jeremy had more than $150,000 of AGI in 2007, he figures his required annual payment as follows. He determines that 90% of his expected tax for 2008 is $64,128 (.90 × $71,253). Next, he determines that 110% of the tax shown on his 2007 return is $46,839 (1.10 x $42,581). Finally, he determines that his required annual payment is $46,839, the smaller of the two.

Farmers and fishermen.   If at least two-thirds of your gross income for 2007 or 2008 is from farming or fishing, your required annual payment is the smaller of:

1. 66⅔% (.6667) of your total tax for 2008, or

2. 100% of the total tax shown on your 2007 return. (Your 2007 tax return must cover all 12 months.)

  For definitions of “gross income from farming” and “gross income from fishing,” see Farmers and Fishermen, under Special Rules on page 20.

Total tax for 2007.   Your 2007 total tax on Form 1040 is the amount on line 63 reduced by the total of the following.

1. The amounts on lines 59, 66a, 68, and 71.

2. The following amounts included on line 60.

   1. Any tax on excess contributions to IRAs, Archer MSAs, Coverdell education savings accounts, and health savings accounts.

   2. Any tax on excess accumulations in qualified retirement plans from Form 5329.

3. The following amounts included on line 63.

   1. Any recapture of a federal mortgage subsidy.

   2. Any tax on golden parachute payments.

   3. Excise tax on insider stock compensation from an expatriated corporation.

   4. Any uncollected employee social security, Medicare, or railroad retirement tax on tips or group-term life insurance.

4. Any credit from Form 4136 or Form 8885 included on line 70.

  On Form 1040A, it is the amount on line 37 reduced by the amount on lines 40a and 41. On Form 1040EZ, it is the amount on line 10 reduced by the amount on line 8a.

Total Estimated Tax Payments Needed—Line 16a

Use lines 15 and 16a to figure the total estimated tax you must pay for 2008. 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 on this page and How To Figure Each Payment on page 24.)

You do not have to pay estimated tax if:

• Line 14c minus line 15 is zero or less, or

• Line 13c minus line 15 is less than $1,000.

Withholding.   Your expected withholding for 2008 (line 15) 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 2008 only if your wages from two or more employers are more than $102,000. (See Excess Social Security or Railroad Retirement Tax Withholding in chapter 3.)

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 payment periods and due dates for estimated tax payments are shown next.