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Pub. 505, Tax Withholding and Estimated Tax 2005 Tax Year

2.   Estimated Tax for 2006

Table of Contents

What's New for 2006

This section summarizes important changes that could affect your estimated tax payments for 2006. More information on these and other changes can be found in Publication 553.

Additional exemption for housing individuals displaced by Hurricane Katrina. You may be able to claim an additional exemption amount of $500 per person (up to $2,000) if you provided housing to a person who was displaced from his or her main home as a result of Hurricane Katrina. For more information, see Taxpayers housing individuals displaced by Hurricane Katrina, later in this chapter.

Personal exemption and itemized deduction phaseouts reduced. The phaseouts of the limitations on personal exemptions and itemized deductions are reduced by 33⅓%.

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

  • A child lived with you and you earned less than $36,348 ($38,348 if married filing jointly), or

  • A child did not live with you and you earned less than $12,120 ($14,120 if married filing jointly).

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 or Roth IRA contribution limits increased. The contribution limit to a traditional or Roth IRA for 2006 is increased to $5,000 if you are 50 or older. Traditional IRA deduction limits increased. For 2006, if you are covered by a retirement plan at work and your filing status is married filing jointly or a qualifying widow(er), your deduction for contributions to a traditional IRA will be reduced (phased out) if your modified adjusted gross income (AGI) is more than $75,000 but less than $85,000. Additional salary reduction contributions to SIMPLE IRAs. For 2006, additional salary reduction contributions can be made to your SIMPLE IRA if you meet certain requirements. For more information, see How Much Can Be Contributed on Your Behalf? in Publication 590, chapter 3.

Standard mileage rates.  For tax years beginning in 2006, the standard mileage rate for the cost of operating your car is:

  • 44½ cents a mile for all business miles driven,

  • 18 cents a mile for the use of your car for medical reasons,

  • 18 cents a mile for the use of your car for a deductible move,

  • 32 cents a mile for the use of your car to provide relief related to Hurricane Katrina, and

  • 14 cents a mile for the use of your car for charitable reasons not related to Hurricane Katrina.

Alternative motor vehicles and refueling property. You may be able to take a credit if you place an energy efficient motor vehicle or alternative fuel vehicle refueling property in service in 2006. You can no longer take a deduction for clean-fuel vehicles or refueling property. For details, see Form 8910 (Form 8911 for alternative fuel vehicle refueling property).

Clean renewable energy bond credit. You may be able to take a credit based on the face amount of any clean renewable energy bond you hold during 2006. The amount of any credit claimed must be included as interest income. For details, see Form 8912.

Nonconventional source fuel credit. You may be able to claim the nonconventional source fuel credit for facilities producing coke or coke gas. Also, the nonconventional source fuel credit is now a general business credit subject to the general business credit tax liability limits. In general, any 2006 unused credit can be carried forward 20 years. See Form 8907 for details.

Qualified contributions expired. You can no longer elect to treat gifts by cash or check as qualified contributions on Schedule A. Qualified contributions for which you made this election were not subject to the 50% of adjusted gross income limit or the overall limit on itemized deductions.

Residential Energy Credits. 
If you make energy saving improvements to your home in 2006, you may be able to take two new credits, the nonbusiness energy property credit and the residential energy efficient property credit. For credit purposes, costs are treated as being paid when the original installation of the item is completed, or in the case of costs connected with the construction or reconstruction of a building, when your original use of the constructed or reconstructed building begins. If less than 80% of the use of an item is for nonbusiness purposes, only that portion of the expenses that are allocable to the nonbusiness use can be used to determine the credit. A home includes a house, houseboat, mobile home, cooperative apartment, condominium, and certain manufactured homes. For factors used in determining if a home is your main home, see Publication 523. You must reduce the basis of your home by the amount of credit allowed.

Tip
If you are a member of a qualified condominium management association for a condominium that you own or a tenant-stockholder in a cooperative housing corporation, you are treated as having paid your proportionate share of any expenses of such association or corporation. Credits must be allocated based on the ratio of individual qualified costs to total qualified costs in the case of joint occupancy.

Nonbusiness energy property credit. You may be able to take a credit equal to (a) 10% of the amount paid in 2006 for qualified energy efficiency improvements installed during 2006, plus (b) any residential energy property costs paid in 2006. However, this credit is limited as follows.

  • A total accumulated credit limit of $500 for all tax years.

  • A maximum accumulated credit limit of $200 for windows for all tax years.

  • A maximum credit for residential energy property costs of $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and $300 for any item of energy efficient building property.

Qualified energy efficiency improvements. Qualified energy efficiency improvements are the following items installed on or in your main home located in the United States if such items are new and can be expected to remain in use for at least 5 years.

  • Any insulation material or system that is specifically or primarily designed to reduce the heat loss or gain of a home when installed in or on such home.

  • Exterior windows (including skylights).

  • Exterior doors.

  • Any metal roof installed on a home, but only if such roof has appropriate pigmented coatings specifically and primarily designed to reduce the heat gain of such home.

Caution
To qualify for the credit, qualified energy efficiency improvements must meet certain energy efficiency requirements. Residential energy property costs. Residential energy property costs are costs of new qualified energy property that is installed on or in connection with your main home located in the United States. This includes labor costs properly allocable to the onsite preparation, assembly, or original installation of the property. Qualified energy property is any of the following.

  • Certain electric heat pump water heaters; electric heat pumps; geothermal heat pumps; central air conditioners; and natural gas, propane, or oil water heaters.

  • Qualified natural gas, propane, or oil furnace or hot water boilers.

  • Certain advanced main air circulating fans used in a natural gas, propane, or oil furnace.

Caution
To qualify for the credit, qualified energy property must meet certain performance and quality standards.

Residential energy efficient property credit. You may be able to take a credit of 30% of your costs of qualified photovoltaic property, solar water heating property, and fuel cell property. This includes labor costs properly allocable to the onsite preparation, assembly, or original installation of the property and for piping or wiring to interconnect such property to the home. This credit is limited to:

  • $2,000 for qualified photovoltaic property costs,

  • $2,000 for qualified solar water heating property costs, and

  • $500 for each half kilowatt of capacity of qualified fuel cell property for which qualified fuel cell property costs are paid.

Caution
Costs allocable to a swimming pool, hot tub, or any other energy storage medium that has a function other than the function of such storage do not qualify for the residential energy efficiency credit. Qualified photovoltaic property costs. Qualified photovoltaic property costs are costs for property that uses solar energy to generate electricity for use in a home located in the United States and used by you as a home. This includes costs relating to a solar panel or other property installed as a roof or a portion of a roof. Qualified solar water heating property costs. Qualified solar water heating property costs are costs for property to heat water for use in a home located in the United States and used by you as a home if at least half of the energy used by such property for such purpose is derived from the sun. This includes costs relating to a solar panel or other property installed as a roof or a portion of a roof. To qualify for the credit, the property must be certified for performance by the nonprofit Solar Rating Certification Corporation or a comparable entity endorsed by the government of the state in which such property is installed. Qualified fuel cell property costs. Qualified fuel cell property costs are costs for qualified fuel cell property installed on or in connection with your main home located in the United States. Qualified fuel cell property is an integrated system comprised of a fuel cell stack assembly and associated balance of plant components that converts a fuel into electricity using electrochemical means. To qualify for the credit, the fuel cell property must have a nameplate capacity of at least one-half kilowatt of electricity using an electrochemical process and an electricity-only generation efficiency greater than 30%.
Caution
 Pending legislation may eliminate one or more of the following changes.

Certain credits no longer allowed against alternative minimum tax (AMT). The credit for child and dependent care expenses, credit for the elderly or the disabled, education credits, mortgage interest credit, and carryforwards of the District of Columbia first-time homebuyer credit are no longer allowed against AMT and a new tax liability limit applies. For most people, this limit is your regular tax minus any tentative minimum tax.

AMT exemption amount decreased. The AMT exemption amount will decrease to $33,750 ($45,000 if married filing jointly or a qualifying widow(er); $22,500 if married filing separately).

Expired tax benefits.  The following tax benefits have expired and will not apply for 2006.

  • Deduction from adjusted gross income for educator expenses.

  • Tuition and fees deduction.

  • Deduction for state and local general sales taxes.

  • District of Columbia first-time homebuyer credit (for homes purchased after 2005).

Reminders

Estimated tax safe harbor for higher income individuals. If your adjusted gross income for 2005 was more than $150,000 ($75,000 if married filing a separate return), your withholding and estimated tax payments must be at least the smaller of 90% of your tax liability for 2006 or 110% of the tax shown on your 2005 return (provided your 2005 return covered all 12 months) to avoid an estimated tax penalty.

Who must pay estimated tax. You must pay estimated tax unless the total tax shown on your return minus the amount you paid through withholding (including excess social security and railroad retirement tax withholding) will be less than $1,000.

Payment of estimated tax by electronic funds withdrawal. You may be able to pay your estimated tax by authorizing an automatic withdrawal from your checking or savings account. For more information, see Payment by Electronic Funds Withdrawal under How To Pay Estimated Tax, later.

Employment taxes on household employees. You must include any expected employment (social security, Medicare, and federal unemployment) taxes for household employees when figuring your estimated tax.

Qualified dividends. The maximum tax rate for qualified dividends is 15% (generally, 5% for people whose other income is taxed at the 10% or 15% rate). Use Worksheet 2-6 to figure your estimated tax for 2006 if you expect to receive qualified dividends during the year.

Introduction

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 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 chapter 4.

Tip
It would be helpful for you to keep a copy of your 2005 tax return and an estimate of your 2006 income nearby while reading this chapter.

Topics - This chapter discusses:

  • Who must pay estimated tax,

  • How to figure estimated tax (including illustrated examples),

  • When to pay estimated tax,

  • How to figure each payment, and

  • How to pay estimated tax.

Useful Items - You may want to see:

Publication

  • 553 Highlights of 2005 Tax Changes

Form (and Instructions)

  • 1040-ES
    Estimated Tax for Individuals

See chapter 5 for information about how to get this publication and form.

Worksheets.   The blank worksheets for chapter 2 are placed at the end of the chapter. See Table 2-1, on the next page, to locate what you need.

Table 2-1. Where To Find Worksheets

IF you need... THEN use... ON page...
the 2006 Estimated Tax Worksheet (ES Worksheet)   23, 33
to estimate your taxable social security and railroad retirement benefits—line 1 of ES Worksheet Worksheet 2-1 34
to estimate your self-employment (SE) tax and your deduction for one-half of your SE tax—lines 1 and 11 of ES Worksheet Worksheet 2-2 34
to reduce your itemized deductions because your estimated AGI is more than $150,500 ($75,250 if married filing separately)—line 2 of ES Worksheet Worksheet 2-3 35
to reduce your exemption amount because your estimated AGI is more than $112,875—line 4 of ES Worksheet Worksheet 2-4 35
to compute the additional exemption amount for housing individuals displaced by Hurricane Katrina Worksheet 2-5 35
to estimate your income tax if you have net capital gains or qualified dividends—line 6 of ES Worksheet Worksheet 2-6 36
to refigure your estimated tax during the year Worksheet 2-7 37
to figure your annualized estimated tax payments Worksheet 2-8 38-39
to reduce your itemized deductions for line 6 of Worksheet 2-8 because line 3 of Worksheet 2-8 is more than $150,500 ($75,250 if married filing separately) Worksheet 2-9 40
to reduce your exemptions for line 10 of Worksheet 2-8 because line 3 of Worksheet 2-8 is more than $112,875 Worksheet 2-10 40
to figure the tax for line 12 of Worksheet 2-8 if estimated income includes capital gains or qualified dividends Worksheet 2-11 41
2006 Standard Deduction Tables   42
2006 Tax Rate Schedules   37

Who Does Not Have To Pay Estimated Tax

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.

Estimated tax not required.   You do not have to pay estimated tax for 2006 if you meet all three of the following conditions.

  • You had no tax liability for 2005.

  • You were a U.S. citizen or resident for the whole year.

  • Your 2005 tax year covered a 12-month period.

  You had no tax liability for 2005 if your total tax (defined later under Required Annual Payment) was zero or you did not have to file an income tax return.

Who Must Pay Estimated Tax

If you had a tax liability for 2005, you may have to pay estimated tax for 2006.

General Rule

You must pay estimated tax for 2006 if both of the following apply.

  1. You expect to owe at least $1,000 in tax for 2006, 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 2006 tax return, or

    2. 100% of the tax shown on your 2005 tax return. Your 2005 tax return must cover all 12 months.

You may find Figure 2-A (see next page) helpful in determining if you must pay estimated tax.

Tip
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 2006, Jane, who files as head of household, uses the following information.

Expected AGI for 2006 $78,725
AGI for 2005 $73,700
Tax shown on 2005 return $10,504
Tax expected to be shown on 2006 return $11,501
Tax expected to be withheld in 2006 $10,400

Jane uses Figure 2-A (on the next page). Jane's answer to the chart's first question is YES, she expects to owe at least $1,000 for 2006 after subtracting her withholding from her expected tax ($11,501 - $10,400 = $1,101). Her answer to the chart's second question is also YES, she expects her income tax withholding ($10,400) to be at least 90% of the tax to be shown on her 2006 return ($11,501 × 90% = $10,351). 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 2006. Because that is less than $10,351, 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 2005 return ($10,504). Jane must pay estimated tax for 2006.

Example 3.

The facts are the same as in Example 2, except that the tax shown on Jane's 2005 return was $8,000. Because she expects to have more than $8,000 withheld in 2006, her answer to the chart's third question is YES. Jane does not need to pay estimated tax for 2006.

This image is too large to be displayed in the current screen. Please click the link to view the image.

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

Married Taxpayers

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

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

However, you and your spouse cannot make joint estimated tax payments if:

  • You are legally separated under a decree of divorce or separate maintenance,

  • You and your spouse have different tax years, or

  • Either spouse is a nonresident alien (unless you elected to be treated as a resident alien). See Choosing Resident Alien Status in Publication 519.

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 2006.

2005 separate returns and 2006 joint return.   If you plan to file a joint return with your spouse for 2006, but you filed separate returns for 2005, your 2005 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.

2005 joint return and 2006 separate returns.   If you plan to file a separate return for 2006, but you filed a joint return for 2005, your 2005 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 a joint return, first figure the tax both you and your spouse would have paid had you filed separate returns for 2005 using the same filing status as for 2006. Then multiply the tax on the joint return by the following fraction:

  
  The tax you would have paid had you filed a separate return  
The total tax you and your spouse would have paid had you filed separate returns

Example.

Joe and Heather filed a joint return for 2005 showing taxable income of $48,500 and a tax of $6,549. Of the $48,500 taxable income, $40,100 was Joe's and the rest was Heather's. For 2006, they plan to file married filing separately. Joe figures his share of the tax on the 2005 joint return as follows:

Tax on $40,100 based on separate return $6,696
Tax on $8,400 based on separate return 899
Total $7,595
Joe's percentage of total ($6,696 ÷ $7,595) 88%
Joe's share of tax on joint return
($6,549 × 88%) 		$5,763

Special Rules

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

Farmers and Fishermen

If at least two-thirds of your gross income for 2005 or 2006 is from farming or fishing, substitute 66⅔% for 90% in (2a) under General Rule, earlier.

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 2005 was from farming or fishing, use as your gross income the total of the income (not loss) amounts.

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

  • Income from operating a stock, dairy, poultry, bee, fruit, or truck farm.

  • Income from a plantation, ranch, nursery, range, orchard, or oyster bed.

  • Crop shares for the use of your land.

  • Gains from sales of draft, breeding, dairy, or sporting livestock.

  For 2005, gross income from farming is the total of the amounts from:

  • Schedule F (Form 1040), Profit or Loss From Farming, line 11,

  • Form 4835, Farm Rental Income and Expenses, line 7,

  • Your share of a partnership's or S corporation's gross income from farming,

  • Your share of distributable net income from farming of an estate or trust,

  • 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.

  • Income for services as an officer or crew member of a vessel while the vessel is engaged in fishing.

  • Your share of a partnership's or S corporation's gross income from fishing.

  • 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.

Higher Income Taxpayers

If your adjusted gross income (AGI) for 2005 was more than $150,000 ($75,000 if your filing status for 2006 is married filing a separate return), substitute 110% for 100% in (2b) under General Rule, earlier. This rule does not apply to farmers and fishermen.

For 2005, AGI is the amount shown on Form 1040, line 37; Form 1040A, line 21; and Form 1040EZ, line 4.

Aliens

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

You are an alien if you are not a citizen or national of the United States. You are a resident alien if you either have a green card or meet the substantial presence test. For more information about the substantial presence test, see Publication 519.

Estates and Trusts

Estates and trusts also must pay estimated tax. However, estates (and certain grantor trusts that receive the residue of the decedent's estate under the decedent's will) are exempt from paying estimated tax for the first two years after the decedent's death.

Estates and trusts must use Form 1041-ES, Estimated Income Tax for Estates and Trusts, to figure and pay estimated tax.

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 2006 estimated tax, it may be helpful to use your income, deductions, and credits for 2005 as a starting point. Use your 2005 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 2006, there are several changes in the law. Some of these changes are discussed under What's New for 2006 at the beginning of this chapter. For information about these and other changes in the law, get Publication 553 or visit the IRS web site 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.

2006 Estimated Tax Worksheet

Use the worksheet (Figure 2-B) on the next page to help guide you through the information about completing the 2006 Estimated Tax Worksheet. You will also find a blank worksheet at the end of the chapter.

Expected Adjusted Gross Income—Line 1

Your expected adjusted gross income for 2006 (line 1 of the 2006 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 includes all income and loss for 2006 that, if you had received it in 2005, would have been included on your 2005 tax return in the total on line 22 of Form 1040, line 15 of Form 1040A, or line 4 of Form 1040EZ.

Worksheet you may need to fill in
Social security and railroad retirement benefits. If you expect to receive social security or tier 1 railroad retirement benefits during the year, use Worksheet 2-1 at the end of this chapter to figure the amount of expected taxable benefits you should include on line 1 of the 2006 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 2006 tax return. If you are using your 2005 return as a guide and filed Form 1040, your adjustments for 2005 were on lines 23-35, plus any write-in adjustments on line 36. If you filed Form 1040A, your 2005 adjustments were on lines 16-19.

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

Expected Taxable Income— Lines 2-5

Reduce your expected adjusted gross income for 2006 (line 1 of the 2006 Estimated Tax Worksheet), by either your expected itemized deductions or your standard deduction and by your exemptions (lines 2 through 5 of the 2006 Estimated Tax Worksheet).

Itemized deductions—Line 2.   If you expect to claim itemized deductions on your 2006 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.

Worksheet you may need to fill in
Phaseout of itemized deductions. For 2006, your total itemized deductions may be reduced if your adjusted gross income (AGI) is more than $150,500 ($75,250 if married filing separately). If you expect your AGI to be more than that amount, use Worksheet 2-3 at the end of this chapter to figure the amount to enter on line 2 of your 2006 Estimated Tax Worksheet.

Standard deduction—line 2.   If you expect to claim the standard deduction on your 2006 tax return, subtract it from your expected adjusted gross income. Use the 2006 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:

  • File a separate return and your spouse itemizes deductions,

  • Are a nonresident alien at any time during the tax year, or

  • Make 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 adjusted gross income, reduce the amount remaining by $3,300 for each exemption you expect to take on your 2006 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.

Worksheet you may need to fill in
Reduction of personal exemption amount. For 2006, your deduction for personal exemptions is reduced if your adjusted gross income (AGI) is over the AGI shown below for your filing status.

Single $150,500
Married filing jointly or qualifying widow(er) $225,750
Married filing separately $112,875
Head of household $188,150

If you expect your AGI to be more than that amount, use Worksheet 2-4 at the end of this chapter to figure the amount to enter on line 4 of your 2006 Estimated Tax Worksheet.

However, if in 2006 you housed individuals displaced by Hurricane Katrina, read the following section and complete Worksheet 2-5 before entering an amount on line 4 of your 2006 Estimated Tax Worksheet.

This image is too large to be displayed in the current screen. Please click the link to view the image.

Fig. 2-B. 2006 Estimated Tax Worksheet

Worksheet you may need to fill in
Taxpayers housing individuals displaced by Hurricane Katrina. You may be able to claim an additional exemption amount of $500 per person (up to $2,000) if you provided housing to a person who was displaced from his or her main home because of Hurricane Katrina and all of the following apply.

  • The person displaced lived in your main home for at least 60 consecutive days that ended in 2006.

  • You did not receive any rent or other amount from any source for providing the housing.

  • The main home of the person displaced was, on August 28, 2005, in the Hurricane Katrina disaster area.

  • The person displaced was not your spouse or dependent.

  • You did not claim the maximum exemption amount of $2,000 in 2005.

Use Worksheet 2-5 at the end of this chapter to compute the additional exemption amount. For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma.

Expected Taxes and Credits—Lines 6-13c

After you have figured your expected taxable income (line 5 of the 2006 Estimated Tax Worksheet), follow the steps below to figure your expected taxes, credits, and total tax for 2006. Most people will have entries for only a few of these steps. However, you should check every step to be sure that you do not overlook anything.

Step 1.   Figure your expected income tax (line 6 of the 2006 Estimated Tax Worksheet). Use the 2006 Tax Rate Schedules found 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 $1,700 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 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.

Qualified dividends.   The maximum tax rate for qualified dividends is 15% (generally, 5% for people whose other income is taxed at the 10% or 15% rate).

Worksheet you may need to fill in
Tax on capital gains and qualified dividends. If you expect to have a net capital gain or qualified dividends, use Worksheet 2-6 at the end of this chapter to figure your tax.

Step 2.   Add your expected taxes (line 8 of the 2006 Estimated Tax Worksheet). Include on line 8 the sum of:

  1. Your tax on line 6 of the worksheet,

  2. Your expected alternative minimum tax from Form 6251, Alternative Minimum Tax—Individuals, on line 7 of the worksheet,

  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 2005 Form 1040), and

  4. Any recapture of education credits.

Step 3.   Subtract your expected credits (line 9 of the 2006 Estimated Tax Worksheet). If you are using your 2005 return as a guide and filed Form 1040, your total credits for 2005 were shown on line 56. If you filed Form 1040A, your total credits for 2005 were on line 35.

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

Step 4.   Add your expected self-employment tax (line 11 of the 2006 Estimated Tax Worksheet). You should have already figured your self-employment tax (see Self-employed under Expected Adjusted Gross Income, earlier in this chapter).

Step 5.   Add your expected other taxes (line 12 of the 2006 Estimated Tax Worksheet).

  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.

  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, social security and Medicare tax on unreported tip income, or uncollected employee social security and Medicare or RRTA tax on tips or group-term life insurance.

  If you filed a 2005 Form 1040A, your only “other taxes” were any advance earned income credit payments on line 37.

Step 6.   Subtract your expected earned income credit, additional child tax credit, Form 4136 fuel tax credit, and Form 8885 health coverage tax credit (line 13b of the 2006 Estimated Tax Worksheet). These are shown on the 2005 Form 1040, lines 66a, 68, and 70.

  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 2005 Form 1040A, line 41a. The additional child tax credit is shown on the 2005 Form 1040A, line 42.

  The result of steps 1 through 6 is your total estimated tax for 2006 (line 13c of the 2006 Estimated Tax Worksheet).

Required Annual Payment— Line 14c

You figure the total amount you must pay for 2006 through withholding and estimated tax payments on lines 14a through 14c of the 2006 Estimated Tax Worksheet.

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

  1. 90% of your total expected tax for 2006, or

  2. 100% of the total tax shown on your 2005 return. Your 2005 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 adjusted gross income (AGI) for 2005 was more than $150,000 ($75,000 if your filing status for 2006 is married filing a separate return), substitute 110% for 100% in (2) above. This rule does not apply to farmers and fishermen.

For 2005, AGI is the amount shown on Form 1040, line 37; Form 1040A, line 21; and Form 1040EZ, line 4.

Farmers and fishermen.   If at least two-thirds of your gross income for 2005 or 2006 is from farming or fishing, your required annual payment is the smaller of:

  1. 66⅔% (.6667) of your total tax for 2006, or

  2. 100% of the total tax shown on your 2005 return. (Your 2005 tax return must cover all 12 months.)

  For definitions of “gross income from farming” and “gross income from fishing,” see Farmers and Fishermen, earlier, under Who Must Pay Estimated Tax.

Total tax for 2005.   Your 2005 total tax on Form 1040 is the amount on line 63 reduced by the total of the amounts on lines 59, 66a, and 68, any credit from Form 4136 or Form 8885 included on line 70, any recapture of a federal mortgage subsidy, any tax on golden parachute payments, excise tax on insider stock compensation from an expatriated corporation, and any uncollected social security, Medicare, or railroad retirement tax included on line 63, and any tax on excess contributions to IRAs, Archer MSAs, Coverdell education savings accounts, and health savings accounts and on excess accumulations in qualified retirement plans from Form 5329 included on line 60.

  On Form 1040A, it is the amount on line 38 reduced by the amounts on lines 41a and 42. On Form 1040EZ, it is the amount on line 10 reduced by the amount on line 8a.

Example.   Jeremy Martin's total tax on his 2005 return was $43,693, and his expected tax for 2006 is $71,253. His 2005 AGI was $180,000. Because Jeremy had more than $150,000 of AGI in 2005, he figures his required annual payment as follows. He determines that 90% of his expected tax for 2006 is $64,128 (.90 × $71,253). Next, he determines that 110% of the tax shown on his 2005 return is $48,062 (1.10 x $43,693). Finally, he determines that his required annual payment is $48,062, the smaller of the two.

Total Estimated Tax Payments—Line 16

Figure the total estimated tax you must pay for 2006 on lines 15 and 16 of the 2006 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 have to pay estimated tax.

Withholding.   Your expected withholding for 2006 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 2006 only if your wages from two or more employers are more than $94,200.

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

For the period: Due date:
Jan. 1 1 - March 31 April 15
April 1 - May 31 June 15
June 1 - August 31 September 15
Sept. 1 - Dec. 31 January 15
next year 2

1If your tax year does not begin on January 1,
see Fiscal year taxpayers, later.
2See January payment, later.

Saturday, Sunday, holiday rule.   If the due date for 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 business day. For example, a payment due Monday, January 15, 2007, will be on time if you make it by Tuesday, January 16, 2007. January 15, 2007, is a legal holiday.

January payment.   If you file your 2006 Form 1040 or Form 1040A by January 31, 2007, and pay the rest of the tax you owe, you do not need to make the payment due on January 15, 2007.

  A payment for the fourth payment period that is made by January 16, 2007, is considered made on January 15, 2007.

Example.

Janet Adams does not pay any estimated tax for 2006. She files her 2006 income tax return and pays the balance due as shown on her return on January 24, 2007.

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, 2007.

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 do not have income subject to estimated tax until a later payment period, you can 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. Table 2-2 shows the dates for making installment payments.

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.

Farmers and Fishermen

If at least two-thirds of your gross income for 2005 or 2006 is from farming or fishing, you have only one payment due date for your 2006 estimated tax, January 15, 2007. The due dates for the first three payment periods, discussed earlier under When To Pay Estimated Tax, do not apply to you.

A payment made by January 16, 2007, is considered made on January 15, 2007.

If you file your 2006 Form 1040 by March 1, 2007, and pay all the tax you owe, you do not need to pay estimated tax.

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:

  • Pay all your estimated tax by the 15th day after the end of your tax year, or

  • 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.

Table 2-2. Due Dates for Estimated Tax Installment Payments

If you first have income on which you must pay estimated tax: Make a
payment
by:* 		Make later
installments
by:*
Before April 1 April 15 June 15
    Sept. 15
    Jan. 15 next year
April 1-May 31 June 15 Sept. 15
    Jan. 15 next year
June 1-Aug. 31 Sept. 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.

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, 2006, you can figure your required payment for each period by dividing your annual estimated tax due (line 16 of the 2006 Estimated Tax Worksheet) by 4. Use this method only if your income is basically the same throughout the year.

Household employers.   Reduce your required payment for each period by the amount of advance EIC payments paid during the period.

Change in estimated tax.   After you make an 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.

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.

Worksheet you may need to fill in
Amended estimated tax. If you refigure your estimated tax during the year, or if your first estimated tax payment is due after April 15, 2006, figure your required payment for each remaining payment period using Worksheet 2-7 at the end of this chapter.

Example.

Early in 2006, Mira figures her estimated tax due is $1,800. She makes estimated tax payments on April 15 and June 15 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, as shown in her filled-in Worksheet 2-7 on the next page.

Worksheet 2-7. Amended Estimated Tax Worksheet—Illustrated

         
1. Amended total estimated tax due 1. $4,100
2. Multiply line 1 by:    
  .50 if next payment is due June 15, 2006    
  .75 if next payment is due September 15, 2006    
  1.00 if next payment is due January 15, 2007 2. 3,075
3. Estimated tax payments for all previous periods 3. 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 4. $2,175
  Note. If the payment on line 4 is due January 15, 2007, stop here. Otherwise, go to line 5.    
5. Add lines 3 and 4 5. 3,075
6. Subtract line 5 from line 1 and enter the result (but not less than zero) 6. 1,025
7. Each following required payment: If the payment on line 4 is due June 15, 2006, enter one-half of the amount on line 6 here and on the payment vouchers for your payments due September 15, 2006, and January 15, 2007. If the amount on line 4 is due September 15, 2006, enter the full amount on line 6 here and on the payment voucher for your payment due January 15, 2007 7. $1,025

If Mira's estimated tax does not change again, her required estimated tax payment for the fourth payment period will be $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.

Annualized Income Installment Method

If you do not receive your income evenly throughout the year (for example, your income from a repair shop you operate is much larger in the summer than it is during the rest of the year), your required estimated tax payment for one or more periods may be less than the amount figured using the regular installment method.

The annualized income installment method annualizes your tax at the end of each period based on a reasonable estimate of your income, deductions, and other items relating to events that occurred from the beginning of the tax year through the end of the period. To see whether you can pay less for any period, complete the blank 2006 Annualized Estimated Tax Worksheet (Worksheet 2-8) at the end of this chapter. (Note. You must first complete the 2006 Estimated Tax Worksheet through line 16.) Use the result you figure on line 28 to make your estimated tax payments and complete your payment vouchers.

See Example 2, under Illustrated Examples, for an illustration of the worksheet.

Note: If you use the annualized income installment method to figure your estimated tax payments, you must file Form 2210 with your 2006 tax return. See Annualized Income Installment Method (Schedule AI) in chapter 4 for more information.

Instructions for the 2006 Annualized Estimated Tax Worksheet (Worksheet 2-8)

Tip
Use Figure 2-C on the next page to help you follow these instructions. Another worksheet is available for your use at the end of this chapter.

The purpose of this worksheet is to determine your estimated tax liability as your income accumulates throughout the year, rather than dividing your entire year's estimated tax liability by four as if your income was earned equally throughout the year. The top of the worksheet (see next page) shows the dates for each payment period. The periods build; that is, each period includes all previous periods. After the end of each payment period, complete the corresponding worksheet column to figure the payment due for that period.

This image is too large to be displayed in the current screen. Please click the link to view the image.

Figure 2-C. Worksheet for Annualized Income Installment Method.

Line 1.   Enter your adjusted gross income for the period. This is your gross income, including your share of partnership or S corporation income or loss, for the period, minus your adjustments to income for that period. (See Expected Adjusted Gross Income—Line 1 under How To Figure Estimated Tax, earlier.)

Self-employment income.   If you had self-employment income, first complete Section B of this worksheet. Use the amounts on line 39 when figuring the amount of adjusted gross income to enter on line 1.

Line 4.   Be sure to consider all deduction limits figured on Schedule A, such as reducing your medical expenses by 7.5% of your AGI, or reducing certain miscellaneous deductions by 2% of your AGI.

Line 6.   Multiply line 4 by line 5 and enter the result on line 6, unless line 3 is more than $150,500 ($75,250 if married filing separately). In that case, use Worksheet 2-9 at the end of this chapter to figure the amount to enter on line 6. Complete this worksheet for each period, as necessary.

Line 7.   See the 2006 Standard Deduction Tables at the end of this chapter. Find your standard deduction in the appropriate table.

Line 10.   Multiply $3,300 by your total expected exemptions, unless line 3 is more than the amount shown below for your filing status.
Single $150,500
Married filing jointly or
qualifying widow(er) 		$225,750
Married filing separately $112,875
Head of household $188,150

  In that case, use Worksheet 2-10 at the end of this chapter to figure the amount to enter on line 10. However, if, in 2006, you housed individuals displaced by Hurricane Katrina, read the following section and complete Worksheet 2-5 before entering an amount on line 10 of your 2006 Annualized Estimated Tax Worksheet.

Taxpayers housing individuals displaced by Hurricane Katrina.   You may be able to claim an additional exemption amount of $500 per person (up to $2,000) if you provided housing to a person who was displaced from his or her main home because of Hurricane Katrina and all of the following apply.

  • The person displaced lived in your main home for at least 60 consecutive days.

  • You did not receive any rent or other amount from any source for providing the housing.

  • The main home of the person displaced was, on August 28, 2005, in the Hurricane Katrina disaster area.

  • The person displaced was not your spouse or dependent.

  • You did not claim the maximum exemption amount of $2,000 in 2005.

  Use Worksheet 2-5 at the end of this chapter to compute the additional exemption amount. For more information, see Publication 4492.

Line 12.   Use the 2006 Tax Rate Schedules at the end of this chapter or in the instructions to Form 1040-ES to figure your annualized income tax. For the special method that must be used to figure tax on the income of a child under 14 who has more than $1,700 investment income, see Tax on Investment Income of Child Under 14 in Publication 929.

Capital gains tax computation.   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.

Worksheet you may need to fill in
Tax on capital gains and qualified dividends. If the amount on line 1 includes capital gains or qualified dividends, use Worksheet 2-11 at the end of this chapter to figure the amount to enter on line 12.

Line 13.   Enter your self-employment tax for the period from line 37.

Line 14.   Include all the taxes you will owe (other than income tax and self-employment tax) because of events that occurred during the period.

  If you filed a 2005 Form 1040, these include:

  • Taxes on qualified plans, including IRAs, and other tax favored accounts,

  • Advance earned income credit,

  • Household employment taxes that are reported on your income tax return, and

  • Amounts written in on line 63 of Form 1040.

  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, social security and Medicare tax on unreported tip income, and any uncollected social security, Medicare, or railroad retirement tax.

  If you filed a 2005 Form 1040A, “other tax” is any advance earned income credit payments on line 37 of that form.

Line 16.   Include all the credits (other than withholding credits) you can claim because of events that occurred during the period. If you are using your 2005 return as a guide and filed Form 1040, your 2005 credits included the credits on lines 66a, 68, and 70 boxes b and c, and the credits that are included in the total on line 56 (lines 46-55). If you filed Form 1040A, your 2005 credits included the credits on lines 41a and 42.

Line 25.   If line 24 is smaller than line 21 and you are not certain of the estimate of your 2006 tax, you can avoid a penalty by entering the amount from line 21 on line 25.

Line 27.   Include all estimated tax payments credited to 2006 and federal income tax withholding through the payment due date for the period. Also include excess social security and excess railroad retirement for the period.

  Your withholding is considered paid in four equal installments, one on the due date of each payment period. To figure the amount to include on line 27 for each period, multiply your total expected withholding for 2006 by:

  • 25% (.25) for the first period,

  • 50% (.50) for the second period,

  • 75% (.75) for the third period, or

  • 100% (1.00) for the fourth period.

  However, you may choose to include your actual withholding through the due date for each period on line 27. You can make this choice separately for the taxes withheld from your wages and all other withholding. For an explanation of what to include in withholding, see Total Estimated Tax Payments—Line 16 under How To Figure Estimated Tax, earlier.

Section B.   If you had income from self-employment during any period, complete the worksheet column for that period to figure your annualized self-employment tax before you complete the worksheet column for that period in Section A.

Nonresident aliens.   If you will file Form 1040NR and you do not receive wages as an employee subject to U.S. income tax withholding, the instructions for the worksheet are modified as follows.

  1. Skip column (a).

  2. On line 1, enter your income for the period that is effectively connected with a U.S. trade or business.

  3. On line 17, increase your entry by the amount determined by multiplying your income for the period that is not effectively connected with a U.S. trade or business by the following.

    1. 72% for column (b).

    2. 45% for column (c).

    3. 30% for column (d).

    However, if you can use a treaty rate lower than 30%, use the percentages determined by multiplying your treaty rate by 2.4, 1.5, and 1, respectively.

  4. On line 22, enter one-half of the amount from line 16c of the Form 1040-ES(NR) 2006 Estimated Tax Worksheet in column (b), and one-fourth in columns (c) and (d).

  5. On lines 20 and 23, skip column (b).

  6. On line 27, if you do not use the actual withholding method, include one-third of your total expected withholding in column (b) and two-thirds in columns (c) and (d).

  See Publication 519 for more information.

Estimated Tax Payments Not Required

You do not have to pay estimated tax if your withholding in each payment period is at least as much as:

  • One-fourth of your required annual payment, or

  • Your required annualized income installment for that period.

You also do not have to pay estimated tax if you will pay enough through withholding to keep the amount you will owe with your return under $1,000.

How To Pay Estimated Tax

There are five ways to pay estimated tax.

  • By crediting an overpayment on your 2005 return to your 2006 estimated tax.

  • By sending in your payment with a payment voucher from Form 1040-ES.

  • By paying electronically using the Electronic Federal Tax Payment System (EFTPS).

  • By electronic funds withdrawal if you are filing Form 1040 or Form 1040A electronically.

  • By credit card using a pay-by-phone system or the Internet.

Crediting an Overpayment

If you show an overpayment of tax on your Form 1040 or Form 1040A for 2005, you can apply part or all of it to your estimated tax for 2006. On line 74 of Form 1040, or line 46 of Form 1040A, enter 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.

If you are a beneficiary of an estate or trust, and the trustee elects to credit 2006 trust payments of estimated tax to you, you can treat the amount credited as paid by you on January 15, 2007.

The credit will be applied to your payments in the order necessary to avoid the penalty for underpayment of estimated tax. You cannot have any of that amount refunded to you until the close of that tax year. You also cannot use that overpayment in any other way.

Example.

When Kathleen finished filling out her 2005 tax return, she saw that she had overpaid her taxes by $750. Kathleen knew she would owe additional tax in 2006. She credited $600 of the overpayment to her 2006 estimated tax and had the remaining $150 refunded to her.

In September, she amended her 2005 return by filing Form 1040X, Amended U.S. Individual Income Tax Return. It turned out that she owed $250 more in tax than she had thought. This reduced her 2005 overpayment from $750 to $500. Because the $750 had already been applied to her 2006 estimated tax or refunded to her, the IRS billed her for the additional $250 she owed, plus penalties and interest. Kathleen could not use any of the $600 she had credited to her 2006 estimated tax to pay this bill.

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 2006 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 previously made one or more payments electronically, you will receive Form 1040-ES (E), which does not include payment vouchers. Instead please continue to make your payments electronically. This helps ensure that your account is properly and timely credited.

If you did not pay estimated tax last year, you will have to get a copy of Form 1040-ES from the IRS. See chapter 5. 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 envelopes, make sure you mail your payment vouchers to the address shown in the Form 1040-ES instructions for the place where you live.

Caution
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 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.

  • 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.

Electronic Federal Tax Payment System (EFTPS)

EFTPS is a free tax payment system that all individuals and businesses can use. You can make payments online or by phone.

Here are just a few of the benefits of this easy-to-use system.

  • Convenient and flexible. It is available 24 hours a day, 7 days a week, and you can use it to schedule payments in advance. For example, you can schedule estimated tax payments weekly, monthly, or quarterly.

  • Fast and accurate. You can make a tax payment in minutes. Because there are verification steps along the way, you can check and review your information before sending it.

  • Safe and secure. It offers the highest available levels of security. Every transaction receives an immediate confirmation.

For more information or details on enrolling, visit www.EFTPS.gov or call EFTPS Customer Service at 1-800-555-4477 (business accounts) or 1-800-316-6541 (individual accounts). Call 1-800-733-4829 if you are a TTY/TDD user. Call 1-800-244-4829 for Spanish.

Payment by Electronic Funds Withdrawal

You can make a 2006 estimated tax payment when you electronically file your 2005 Form 1040 or Form 1040A by authorizing an electronic funds withdrawal from your checking or savings account. Regardless of whether you have a balance due on your electronically filed tax return, you can schedule a one-time estimated tax payment for April 15, 2006, June 15, 2006, or September 15, 2006. Do not send in a Form 1040-ES payment voucher when you schedule an estimated tax payment by electronic funds withdrawal.

Payment by Credit Card

You can use your American Express® Card, Discover® Card, MasterCard® card, or Visa® card to make estimated tax payments. Call or access by Internet one of the service providers listed below and follow the instructions of the provider. Each provider will charge a convenience fee based on the amount you are paying. You can find out what the fee will be by calling the provider's toll-free automated customer service number or visiting the provider's web site shown below.


Link2Gov Corporation
1-888-PAY-1040 SM (1-888-729-1040)
1-888-658-5465 (Customer Service)
www.PAY1040.com

Official Payments Corporation
1-800-2PAY-TAX SM (1-800-272-9829)
1-877-754-4413 (Customer Service)
www.officialpayments.com

See the Form 1040-ES instructions for more information.

Illustrated Examples

The following examples show how to figure estimated tax payments under the regular installment method and under the annualized income installment method.

Example 1—Regular Installment Method

Early in 2006, Anne and Larry Jones figure their estimated tax payments for the year. They expect to receive the following income during 2006.

Larry's salary $34,200
Unemployment compensation 600
Anne's net profit from self-employment 38,500
Net rental income 2,671
Interest income 2,300
Dividends 3,745
Total $82,016
   

They also use the following expected items to figure their estimated tax.

Adjustment to income for IRA contributions $ 1,000
Itemized deductions 10,500
Deduction for exemptions ($3,300 × 2) 6,600
2005 total tax 15,220
Withholding 5,792

The Joneses plan to file a joint return. They use the 2006 Estimated Tax Worksheet included in Form 1040-ES to figure their estimated tax payments. Their filled-in worksheet follows Example 2.

Expected adjusted gross income.   Anne can claim an income tax deduction for one-half of her self-employment tax as a business expense. So before the Joneses figure their expected adjusted gross income, they figure Anne's expected self-employment tax. See their filled-in Worksheet 2-2 below.

Worksheet 2-2. Expected Self-Employment Tax—Illustrated

1. Enter your expected income and profits subject to self-employment tax* 1. $38,500
2. Multiply line 1 by 92.35% (.9235) 2. 35,555
3. Multiply line 2 by 2.9% (.029) 3. 1,031
4. Social security tax maximum income 4. $94,200
5. Enter your expected wages (if subject to social security tax) 5. -0-
6. Subtract line 5 from line 4 6. 94,200
  Note.If line 6 is zero or less, enter -0- on line 8 and skip to line 9.    
7. Enter the smaller of line 2 or line 6 7. 35,555
8. Multiply line 7 by 12.4% (.124) 8. 4,409
9. Add line 3 and line 8. Enter the result here and on line 11 of your 2006 Estimated Tax Worksheet 9. $5,440
10. Multiply line 9 by .50. This is your expected deduction for one-half of your self-employment tax. 10. $2,720
*Your net profit from self-employment is found on line 31 of Schedule C or line 3 of Schedule C-EZ.

  On line 11 of their 2006 Estimated Tax Worksheet, the Joneses enter $35,555 on the dotted line and $5,440 in the blank. They subtract one-half of that amount, $2,720, and their $1,000 adjustment for IRA contributions from their $82,016 total income to find their expected adjusted gross income, $78,296. They enter that amount on line 1 of the worksheet. See their filled-in 2006 Estimated Tax Worksheet showing the regular installment method, Figure 2-D, on page 31.

Expected taxable income.   The Joneses find their standard deduction, $10,300, in the 2006 Standard Deduction Tables. This is smaller than their expected itemized deductions, so they enter $10,500 on line 2 of the worksheet. They subtract the amount on line 2 from the amount on line 1 and enter the result, $67,796, on line 3. They enter their deduction for exemptions, $6,600, on line 4. After subtracting this amount, their expected taxable income on line 5 is $61,196.

Expected taxes and credits.   The Joneses use the 2006 Tax Rate Schedule Y-1 at the end of this chapter to figure their expected income tax, and enter $8,424 on line 6 of the worksheet. They do not expect to owe any other taxes that would be entered on lines 7 or 12, or have any credits that would be entered on lines 9 or 13b, so they leave those lines blank.

  The Joneses' total expected tax on line 13c, after adding Anne's self-employment tax, is $13,864.

Estimated tax.   The Joneses multiply their total expected tax by 90% and enter $12,478 on line 14a of the worksheet. They enter their 2005 tax on line 14b. Their required annual payment on line 14c is the smaller amount, $12,478.

  They enter Larry's expected withholding, $5,792, on line 15 and subtract it from their required annual payment. Their estimated tax on line 16 is $6,686.

Required estimated tax payment.   The Joneses must pay their first estimated tax payment by April 17, 2006. They enter one-fourth of their estimated tax, $1,672, on line 17 of the worksheet and on their Form 1040-ES payment voucher that shows “Due April 17, 2006.” They mail the voucher with their payment to the address shown for their area in the Form 1040-ES instructions and record the payment on the Record of Estimated Tax Payments in the instructions.

  If their estimated tax does not change during the year, the Joneses also will pay $1,672 estimated tax by June 15 and September 15, 2006, and January 16, 2007.

Example 2—Annualized Income Installment Method

The facts are the same as in Example 1, except that the Joneses do not expect to receive their income evenly throughout the year. Anne expects to receive the largest portion of her self-employment income during the last few months of the year, and the Joneses' rental income is from a vacation home rented only in the summer months.

After completing their 2006 Estimated Tax Worksheet, the Joneses decide to use the annualized income installment method to see if they can pay less than $1,672 estimated tax for one or more payment periods. They complete the 2006 Annualized Estimated Tax Worksheet (Worksheet 2-8) in this chapter. See their filled-in worksheet (Figure 2-E) on page 32.

First Period

On April 1, 2006, the Joneses complete the first column of the worksheet for the period January 1 through March 31. They had the following income for the period.

Larry's salary $8,550
Unemployment compensation 600
Anne's net profit from self-employment 3,000
Net rental income -0-
Interest income 500
Dividends 462
Total $13,112
   

They also take into account the following items for the period.

Adjustment to income for IRA contributions $ 150
Itemized deductions 1,200
Withholding 1,350

Annualized adjusted gross income.   Before the Joneses figure their adjusted gross income for the period, they first figure Anne's self-employment tax in Section B, and then her adjustment to income for self-employment tax.

  On line 29 of Section B, they enter $2,771, which is Anne's net profit from self-employment for the period ($3,000 x .9235). The prorated social security tax limit is preprinted on line 30. She has no social security wages, so they enter zero on line 31, and $23,550 on line 32. Anne's annualized social security tax on line 34 is $1,374, ($2,771 × .496). Her annualized Medicare tax on line 36 is $321 ($2,771 × .116). Her total annualized self-employment tax on line 37 is $1,695. They enter that amount on line 13 of Section A.

  The Joneses figure their adjustment to income for Anne's self-employment tax on lines 38 and 39. That amount is $212 ($1,695 ÷ 8). They subtract that amount and their $150 IRA contributions from their $13,112 total income and enter their adjusted gross income for the period, $12,750, on line 1 of Section A. They multiply that amount by 4 and enter their annualized adjusted gross income, $51,000, on line 3.

Annualized taxable income.   The Joneses figure their annualized itemized deductions ($1,200 × 4) on lines 4 through 6 of Section A. Because the result is smaller than their standard deduction, they enter their $10,300 standard deduction on line 8. After subtracting that amount and their $6,600 deduction for exemptions, the Joneses' annualized taxable income on line 11 is $34,100.

Annualized taxes and credits.   The Joneses use the 2006 Tax Rate Schedule Y-1 at the end of this chapter to figure their annualized income tax, $4,360, which they enter on line 12 of Section A.

  The Joneses have no other taxes or credits for the period that would be entered on lines 14 or 16, so they leave those lines blank and enter $6,055 ($4,360 + $1,695) on lines 15 and 17. This is their annualized total tax.

Required estimated tax payment.   The Joneses' annualized income installment on line 21 of Section A is $1,362 ($6,055 × 22.5%). On lines 22 and 24 they enter $3,120, one-fourth of their $12,478 required annual payment (line 14c of the 2006 Estimated Tax Worksheet). Because $1,362 is smaller, they enter that amount on lines 25 and 26.

  Larry's total expected withholding for the year is $5,792. The Joneses can treat one-fourth of that amount, $1,448, as paid on April 15, or they can choose to use Larry's actual withholding for the period, $1,350. The Joneses enter $1,448 on line 27.

  On line 28, the Joneses' required estimated tax payment for the period under the annualized income installment method is $0 ($1,362 - $1,448 is less than zero). Therefore, they do not have to send in an estimated tax payment for the first period.

Second, Third, and Fourth Periods

After the end of each remaining payment period, the Joneses complete the column of the worksheet for that period (from the beginning of the year through the end of that payment period) in the same way they did for the first period. They had the following income for each period.

  Second
Period		 Third
Period		 Fourth
Period
  Jan. 1-
May 31 		Jan. 1-
Aug. 31 		Jan. 1-
Dec. 31
Larry's salary $17,100 $25,650 $34,200
Unemployment compensation 600 600 600
Anne's net profit from self-employment 6,000 15,850 38,500
Net rental income 668 2,671 2,671
Interest income 850 1,450 2,300
Dividends 674 1,708 3,745
Total $25,892 $47,929 $82,016
       

They also take into account the following items for each period.

  Second
Period		 Third
Period		 Fourth
Period
  Jan. 1-
May 31 		Jan. 1-
Aug. 31		 Jan. 1-
Dec. 31
Adjustment to income for IRA contributions $ 250 $ 400 $1,000
Itemized deductions 2,700 6,400 10,500

For the second period, as for the first, the annualized income installment method allows the Joneses to pay less than their required payment under the regular installment method of figuring estimated tax payments. They make up the difference in the third and fourth periods when their income is higher.

Because the Joneses are using the annualized income installment method, they will file Form 2210 with their tax return for 2006.

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Figure 2-D. Illustrated Example 1--Regular Installment Method

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Figure 2-E. Illustrated Example 2--Annualized Income Installment Method

Worksheets for Chapter 2

   
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2006 Estimated Tax Worksheet

Worksheet 2-1. 2006 Estimated Tax Worksheet—Line 1 Expected Taxable Social Security and Railroad Retirement Benefits

1. Enter your expected social security and railroad retirement benefits 1.  
2. Enter one-half of line 1 2.  
3. Enter your expected total income. Do not include any social security and railroad retirement benefits, nontaxable interest income, nontaxable IRA distributions, or nontaxable pension distributions 3.  
4. Enter your expected nontaxable interest income 4.  
5. Add lines 2, 3, and 4 5.  
6. Enter your expected adjustments to income except any student loan interest deduction and any tuition and fees deduction 6.  
7. Subtract line 6 from line 5 7.  
8. Enter $25,000 ($32,000 if you expect to file married filing a joint return; $0 if you expect to file married filing a separate return and expect to live with your spouse at any time during the year) 8.  
9. Subtract line 8 from line 7. If zero or less, stop here. Do not include any social security or railroad retirement benefits on line 1 of your 2006 Estimated Tax Worksheet 9.  
10. Enter $9,000 ($12,000 if you expect to file married filing a joint return; $0 if you expect to file married filing a separate return and expect to live with your spouse at any time during the year) 10.  
11. Subtract line 10 from line 9. If zero or less, enter -0- 11.  
12. Enter the smaller of line 9 or line 10 12.  
13. Enter one-half of line 12 13.  
14. Enter the smaller of line 2 or line 13 14.  
15. Multiply line 11 by 85% (.85). If line 11 is zero, enter -0- 15.  
16. Add lines 14 and 15 16.  
17. Multiply line 1 by 85% (.85) 17.  
18. Enter the smaller of line 16 or line 17. This is the amount of your expected taxable social security and railroad retirement benefits. Include this amount in the total on line 1 of your 2006 Estimated Tax Worksheet 18.  
 
 

Worksheet 2-2. 2006 Estimated Tax Worksheet—Line 1 Expected Self-Employment Tax and Deduction

1. Enter your expected income and profits subject to self-employment tax* 1.  
2. Multiply line 1 by 92.35% (.9235) 2.  
3. Multiply line 2 by 2.9% (.029) 3.  
4. Social security tax maximum income 4. $94,200
5. Enter your expected wages (if subject to social security tax) 5.  
6. Subtract line 5 from line 4 6.  
  Note.If line 6 is zero or less, enter -0- on line 8 and skip to line 9.    
7. Enter the smaller of line 2 or line 6 7.  
8. Multiply line 7 by 12.4% (.124) 8.  
9. Add line 3 and line 8. Enter the result here and on line 11 of your 2006 Estimated Tax Worksheet 9.  
10. Multiply line 9 by .50. This is your expected deduction for one-half of your self-employment tax. 10.  
*Your net profit from self-employment is found on line 31 of Schedule C or line 3 of Schedule C-EZ.

Worksheet 2-3. 2006 Estimated Tax Worksheet—Line 2 Phaseout of Itemized Deductions

       
1. Enter the estimated total of your itemized deductions 1.  
2. Enter the amount included in line 1 for medical and dental expenses, investment interest, casualty or theft losses, and gambling losses 2.  
3. Subtract line 2 from line 1 3.  
  Note. If line 3 is zero, stop here and enter line 1 of this worksheet on line 2 of the 2006 Estimated Tax Worksheet.    
4. Multiply line 3 by 80% (.80) 4.  
5. Enter the amount from line 1 of the 2006 Estimated Tax Worksheet 5.  
6. Enter $150,500 ($75,250 if married filing separately) 6.  
7. Subtract line 6 from line 5 7.  
8. Multiply line 7 by 3% (.03) 8.  
9. Enter the smaller of line 4 or line 8 9.  
10. Divide line 9 by 3.0. 10.  
11. Subtract line 10 from line 9 11.  
12. Subtract line 11 from line 1. Enter the result here and on line 2 of your 2006 Estimated Tax Worksheet 12.  

Worksheet 2-4. 2006 Estimated Tax Worksheet—Line 4 Reduction of Exemption Amount

         
1. Multiply $3,300 by the number of exemptions you plan to claim 1.  
2. Enter the amount from line 1 of your 2006 Estimated Tax Worksheet 2.  
3. Enter:    
  $150,500 if single    
  $225,750 if married filing jointly or qualifying widow(er)    
  $112,875 if married filing separately    
  $188,150 if head of household 3.  
4. Subtract line 3 from line 2 and enter here 4.  
5. Is line 4 more than $122,500 (more than $61,250 if married filing separately)?    
 
Box
 Yes. Multiply $1,100 by the number of exemptions you plan to claim and enter the result here and on line 4 of your 2006 Estimated Tax Worksheet. Do not complete the rest of this worksheet.    
 
Box
 No. Divide line 4 by $2,500 ($1,250 if married filing separately). If the result is not a whole number, increase it to the next whole number 5.  
6. Multiply line 5 by 2% (.02). Enter the result as a decimal, but not more than 1.0 6. .
7. Multiply line 1 by the decimal on line 6 7.  
8. Divide line 7 by 1.5 8.  
9. Subtract line 8 from line 1. Enter the result here and on line 4 of your 2006 Estimated Tax Worksheet 9.  

Worksheet 2-5. 2006 Estimated Tax Worksheet—Line 4 Additional Exemption Amount for Taxpayers Housing Individuals Displaced by Hurricane Katrina

1. Maximum additional exemption amount. Enter $2,000 ($1,000 if married filing separately) 1.  
2. Did you file Form 8914 in 2005?    
 
Box
 Yes. Enter the additional exemption amount claimed in 2005 from Form 8914, line 2.    
 
Box
 No. Enter -0- 2.  
3. Subtract line 2 from line 1. This is the maximum additional exemption amount you can claim in 2006 3.  
4. Multiply $500 by the total number of displaced individuals that you housed. Do not enter more than the amount shown on line 3 4.  
5. Enter the previously computed exemption amount (see Exemptions—line 4 or Worksheet 2-4, line 9) 5.  
6. Add lines 4 and 5. Enter the result here and on line 4 of your 2006 Estimated Tax Worksheet 6.  

Worksheet 2-6. 2006 Estimated Tax Worksheet—Line 6 Qualified Dividends and Capital Gains Tax Worksheet

       
1. Enter the amount from line 5 of your 2006 Estimated Tax Worksheet 1.  
2. Enter your expected qualified dividends for 2006 1 2.  
3. Enter the net capital gain expected for 2006 1 3.  
4. Add lines 2 and 3 4.  
5. Enter your 28% rate gain or loss expected for 2006 2 5.  
6. Enter the unrecaptured section 1250 gain expected for 2006 6.  
7. Add lines 5 and 6 7.  
8. Enter the smaller of line 3 or line 7 8.  
9. Subtract line 8 from line 4 9.  
10. Subtract line 9 from line 1. If zero or less, enter -0- 10.  
11. Enter the smaller of line 1 or $61,300 ($30,650 if single or married filing separately or $41,050 if head of household) 11.  
12. Enter the smaller of line 10 or line 11 12.  
13. Subtract line 4 from line 1. If zero or less, enter -0- 13.  
14. Enter the larger of line 12 or line 13 14.  
  Note. If line 11 and line 12 are the same, skip lines 15 and 16 and go to line 17.    
15. Subtract line 12 from line 11 15.  
16. Multiply line 15 by 5% (.05) 16.  
  Note. If lines 1 and 11 are the same, skip lines 17-23 and go to line 24.    
17. Enter the smaller of line 1 or line 9 17.  
18. Subtract line 15 from line 17. If zero or less, enter -0- 18.  
19. Multiply line 18 by 15% (.15) 19.  
  Note. If line 6 is zero or blank, skip lines 20-24 and go to line 25.    
20. Enter the smaller of line 3 or line 6 20.  
21. Add lines 4 and 14 21.  
22. Subtract line 1 from line 21. If zero or less, enter -0- 22.  
23. Subtract line 22 from line 20. If zero or less, enter -0- 23.  
24. Multiply line 23 by 25% (.25) 24.  
  Note. If line 5 is zero or blank, skip lines 25-27 and go to line 28.    
25. Add lines 14, 15, 18, and 23 25.  
26. Subtract line 25 from line 1 26.  
27. Multiply line 26 by 28% (.28) 27.  
28. Tax on line 14 from the 2006 Tax Rate Schedules 28.  
29. Add lines 16, 19, 24, 27, and 28 29.  
30. Tax on line 1 from the 2006 Tax Rate Schedules 30.  
31. Tax. Enter the smaller of line 29 or line 30 here and on line 6 of the 2006 Estimated Tax Worksheet 31.  
1 If you expect to deduct investment interest expense, do not include on this line any qualified dividends or net capital gain that you will elect to treat as investment income.
2 This includes a section 1202 exclusion from eligible gain on qualified small business stock and gain or loss from the sale or exchange of collectibles. See the instructions for Schedule D (Form 1040) for more information.

Worksheet 2-7. Amended Estimated Tax Worksheet

         
1. Amended total estimated tax due 1.  
2. Multiply line 1 by:    
  .50 if next payment is due June 15, 2006    
  .75 if next payment is due September 15, 2006    
  1.00 if next payment is due January 15, 2007 2.  
3. Estimated tax payments for all previous periods 3.  
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 4.  
  Note. If the payment on line 4 is due January 15, 2007, stop here. Otherwise, go to line 5.    
5. Add lines 3 and 4 5.  
6. Subtract line 5 from line 1 and enter the result (but not less than zero) 6.  
7. Each following required payment: If the payment on line 4 is due June 15, 2006, enter one-half of the amount on line 6 here and on the payment vouchers for your payments due September 15, 2006, and January 15, 2007. If the amount on line 4 is due September 15, 2006, enter the full amount on line 6 here and on the payment voucher for your payment due January 15, 2007 7.  
 
 
 
 

2006 Tax Rate Schedules

Caution.Do not use Tax Rate Schedules to figure your 2005 taxes. Use only to figure your 2006 estimated taxes.
Single—Schedule X Married filing separately—Schedule Y-2
If line 5 is: The tax is:   of the If line 5 is: The tax is:   of the
Over— But not
over— 		        amount over— Over— But not
over— 		        amount over—
$0 $7,550 - - - - - -   10%   $0 $0 $7,550 - - - - - - -   10%   $0
7,550 30,650 $755.00 + 15%   7,550 7,550 30,650 $755.00 + 15%   7,550
30,650 74,200 4,220.00 + 25%   30,650 30,650 61,850 4,220.00 + 25%   30,650
74,200 154,800 15,107.50 + 28%   74,200 61,850 94,225 12,020.00 + 28%   61,850
154,800 336,550 37,675.50 + 33%   154,800 94,225 168,275 21,085.00 + 33%   94,225
336,550 - - - - - - 97,653.00 + 35%   336,550 168,275 - - - - - - 45,521.50 + 35%   168,275
Married filing jointly or Qualifying
widow(er)—Schedule Y-1 		Head of household—Schedule Z
If line 5 is: The tax is:   of the If line 5 is: The tax is:   of the
Over— But not
over— 		        amount over— Over— But not
over— 		        amount over—
$0 $15,100 - - - - - - - -   10%   $0 $0 $10,750 - - - - - - - -   10%   $0
15,100 61,300 $1,510.00 + 15%   15,100 10,750 41,050 $1,075.00 + 15%   10,750
61,300 123,700 8,440.00 + 25%   61,300 41,050 106,000 5,620.00 + 25%   41,050
123,700 188,450 24,040.00 + 28%   123,700 106,000 171,650 21,857.50 + 28%   106,000
188,450 336,550 42,170.00 + 33%   188,450 171,650 336,550 40,239.50 + 33%   171,650
336,550 - - - - - - - 91,043.00 + 35%   336,550 336,550 - - - - - - - 94,656.50 + 35%   336,550
                           

Worksheet 2-8. 2006 Annualized Estimated Tax Worksheet

Note. For instructions, see Annualized Income Installment Method in chapter 2.
Section A (For Figuring Your Annualized Estimated Tax Payments)—Complete each column after end of period shown.
Estates and trusts: Use the following ending dates in
each column—2/28, 4/30, 7/31, 11/30. 		(a)
1/1/06 to
3/31/06 		(b)
1/1/06 to
5/31/06 		(c)
1/1/06 to
8/31/06 		(d)
1/1/06 to
12/31/06
1 Adjusted gross income for each period. (Caution: See instructions.) Self-employed: Complete Section B first. 1        
2 Annualization amounts. 2 4 2.4 1.5 1
3 Annualized income. Multiply line 1 by line 2. 3        
4 Itemized deductions for period. If you do not expect to itemize, enter -0- and skip to line 7. 4        
5 Annualization amounts. 5 4 2.4 1.5 1
6 Multiply line 4 by line 5. (Caution: See instructions and Worksheet 2-9.) 6        
7 Standard deduction from 2006 tables. 7        
8 Enter the larger of line 6 or line 7. 8        
9 Subtract line 8 from line 3. 9        
10 Multiply $3,300 by your total expected exemptions. (Caution: See instructions and Worksheet 2-10.) 10        
11 Subtract line 10 from line 9. 11        
12 Tax on the amount on line 11 from the 2006 Tax Rate Schedules. (Caution: See instructions and Worksheet 2-11.) 12        
13 Self-employment tax from line 37 of Section B. 13        
14 Other taxes for each payment period. 14        
15 Total tax. Add lines 12, 13, and 14. 15        
16 Credits for each period. 16        
17 Subtract line 16 from line 15. (If less than zero, enter -0-.) 17        
18 Applicable percentage. 18 22.5% 45% 67.5% 90%
19 Multiply line 17 by line 18. 19        
20 Add amounts on line 25 of all preceding columns. 20        
21 Annualized income installment. Subtract line 20 from line 19. (If less than zero, enter -0-.) 21        
22 Divide line 14c of the Form 1040-ES Estimated Tax Worksheet by 4. 22        
23 Subtract line 25 of preceding column from line 24 of preceding column. 23        
24 Add lines 22 and 23. 24        
25 Enter the smaller of line 21 or line 24. (Caution: See instructions.) 25        
26 Total required payments for the period. Add lines 20 and 25. 26        
27 Estimated tax payments made (line 28 of preceding columns) and tax withholding through the due date for the period. 27        
28 Estimated tax payment required by the next due date. Subtract line 27 from line 26 and enter the result (but not less than zero) here and on your payment voucher. 28        

Worksheet 2-8. 2006 Annualized Estimated Worksheet(Continued)

Section B (For Figuring Your Annualized Estimated Self-Employment Tax)—Complete each column after end of period shown.
  (a)
1/1/06 to
3/31/06 		(b)
1/1/06 to
5/31/06 		(c)
1/1/06 to
8/31/06 		(d)
1/1/06 to
12/31/06
29 Net earnings from self-employment for the period. 29        
30 Prorated social security tax limit. 30 $23,550 $39,250 $62,800 $94,200
31 Enter actual wages for the period subject to social security tax or the 6.2% portion of the 7.65% railroad retirement (tier 1) tax. 31        
32 Subtract line 31 from line 30. If zero or less, enter -0-. 32        
33 Annualization amounts. 33 0.496 0.2976 0.186 0.124
34 Multiply line 33 by the smaller of line 29 or line 32. 34        
35 Annualization amounts. 35 0.116 0.0696 0.0435 0.029
36 Multiply line 29 by line 35. 36        
37 Add lines 34 and 36. Enter the result here and on line 13 of Section A. 37        
38 Annualization amounts. 38 8 4.8 3 2
39 Deduction for one-half of self-employment tax. Divide line 37 by line 38. Enter the result here. Also use this result to figure your adjusted gross income on line 1. 39        
   
   

Worksheet 2-9. 2006 Annualized Estimated Tax Worksheet—Line 6 Phaseout of Itemized Deductions

       
1. Enter line 4 of Section A 1.  
2. Enter the amount included in line 1 for medical and dental expenses, investment interest, casualty or theft losses, and gambling losses 2.  
3. Subtract line 2 from line 1 3.  
4. Enter line 5 of Section A 4.  
5. Multiply line 1 by line 4 5.  
  Note. If line 3 is zero, stop here and enter line 5 on line 6 of Section A.    
6. Multiply line 3 by line 4 6.  
7. Multiply line 6 by 80% (.80) 7.  
8. Enter line 3 of Section A 8.  
9. Enter $150,500 ($75,250 if married filing separately) 9.  
10. Subtract line 9 from line 8 10.  
11. Multiply line 10 by 3% (.03) 11.  
12. Enter the smaller of line 7 or line 11 12.  
13. Divide line 12 by 3.0 13.  
14. Subtract line 13 from line 12 14.  
15. Subtract line 14 from line 5. Enter the result here and on line 6 of Section A 15.  

Worksheet 2-10. 2006 Annualized Estimated Tax Worksheet—Line 10 Reduction of Exemption Amount

         
1. Multiply $3,300 by the number of exemptions you plan to claim 1.  
2. Enter line 3 of Section A 2.  
3. Enter the amount shown below for your filing status    
  Single—$150,500
Married filing jointly or qualifying widow(er)—$225,750
Married filing separately—$112,875
Head of household—$188,150 		3.  
4. Subtract line 3 from line 2 4.  
5. Is line 4 more than $122,500 (more than $61,250 if married filing separately)?    
 
Box
 Yes. Multiply $1,100 by the number of exemptions you plan to claim and enter the result here and on line 10 of Section A. Do not complete the rest of this worksheet.    
 
Box
 No. Divide line 4 by $2,500 ($1,250 if married filing separately). If the result is not a whole number, increase it to the next whole number 5.  
6. Multiply line 5 by 2% (.02). Enter the result as a decimal, but not more than 1.0 6. .
7. Multiply line 1 by the decimal on line 6 7.  
8. Divide line 7 by 1.5 8.  
9. Subtract line 8 from line 1. Enter the result here and on line 10 of Section A 9.  

Worksheet 2-11. 2006 Annualized Estimated Tax Worksheet—Line 12 Qualified Dividends and Capital Gains Tax Worksheet

       
1. Enter line 11 of your 2006 Annualized Estimated Tax Worksheet 1.  
2. Enter your expected qualified dividends for 2006 1 2.  
3. Enter the net capital gain expected for 2006 1 3.  
4. Add lines 2 and 3 4.  
5. Enter your 28% rate gain or loss expected for 2006 2 5.  
6. Enter the unrecaptured section 1250 gain expected for 2006 6.  
7. Add lines 5 and 6 7.  
8. Enter the smaller of line 3 or line 7 8.  
9. Subtract line 8 from line 4 9.  
10. Subtract line 9 from line 1. If zero or less, enter -0- 10.  
11. Enter the smaller of line 1 or $61,300 ($30,650 if single or married filing separately or $41,050 if head of household) 11.  
12. Enter the smaller of line 10 or line 11 12.  
13. Subtract line 4 from line 1. If zero or less, enter -0- 13.  
14. Enter the larger of line 12 or line 13 14.  
  Note. If line 11 and line 12 are the same, skip lines 15 and 16 and go to line 17.    
15. Subtract line 12 from line 11 15.  
16. Multiply line 15 by 5% (.05) 16.  
  Note. If lines 1 and 11 are the same, skip lines 17-23 and go to line 24.    
17. Enter the smaller of line 1 or line 9 17.  
18. Subtract line 15 from line 17. If zero or less, enter -0- 18.  
19. Multiply line 18 by 15% (.15) 19.  
  Note. If line 6 is zero or blank, skip lines 20-24 and go to line 25.    
20. Enter the smaller of line 3 or line 6 20.  
21. Add lines 4 and 14 21.  
22. Subtract line 1 from line 21. If zero or less, enter -0- 22.  
23. Subtract line 22 from line 20. If zero or less, enter -0- 23.  
24. Multiply line 23 by 25% (.25) 24.  
  Note. If line 5 is zero or blank, skip lines 25-27 and go to line 28.    
25. Add lines 14, 15, 18, and 23 25.  
26. Subtract line 25 from line 1 26.  
27. Multiply line 26 by 28% (.28) 27.  
28. Tax on line 14 from the 2006 Tax Rate Schedules 28.  
29. Add lines 16, 19, 24, 27, and 28 29.  
30. Tax on line 1 from the 2006 Tax Rate Schedules 30.  
31. Tax. Enter the smaller of line 29 or line 30 here and on line 12 of the 2006 Annualized Estimated Tax Worksheet 31.  

1 If you expect to deduct investment interest expense, do not include on this line any qualified dividends or net capital gain that you will elect to treat as investment income.
2 This includes a section 1202 exclusion from eligible gain on qualified small business stock and gain or loss from the sale or exchange of collectibles. See the instructions for Schedule D (Form 1040) for more information.

2006 Standard Deduction Tables

caution
If you are married filling a separate return and your spouse itemizes deductions, or if you are a dual-status alien, you cannot take the standard deduction even if you were born before January 2, 1942, or you are blind.

Table 2-3. Standard Deduction Chart for Most People*
IF your filing status is... THEN your standard deduction is...
Single or Married filing separately $5,150
Married filing jointly or Qualifying widow(er) with dependent child 10,300
Head of household 7,550

* Do not use this chart if you were born before January 2, 1942, or you are blind, or if someone else can claim an exemption for you (or your spouse if married filing jointly). Use Table 2-4 or 2-5 instead.

 
 

Table 2-4. Standard Deduction Chart for People Born Before January 2, 1942, or Who are Blind*
Check the correct number of boxes below. Then go to the chart.
You Born before January 2, 1942
check box
Blind
check box
     
Your spouse, if claiming spouse's exemption Born before January 2, 1942
check box
Blind
check box
     
Total number of boxes you checked
check box
IF your
filing status is... 		AND the number in the box above is... THEN your standard deduction is...
Single 1 $6,400
  2 7,650
Married filing jointly or 1 11,300
Qualifying widow(er) 2 12,300
with dependent child 3 13,300
  4 14,300
Married filing 1 6,150
separately 2 7,150
  3 8,150
  4 9,150
Head of household 1 8,800
  2 10,050

* If someone can claim an exemption for you (or your spouse if married filing jointly), use Table 2-5, instead.

Table 2-5. Standard Deduction Worksheet for Dependents
Use this worksheet only if someone else can claim an exemption for you (or your spouse if married filing jointly).
If you were born before January 2, 1942, or you are blind, check the correct number of boxes below. Then go to the worksheet.
You Born before January 2, 1942
check box
Blind
check box
     
Your spouse, if claiming spouse's exemption Born before January 2, 1942
check box
Blind
check box
     
Total number of boxes you checked
check box

1. Enter your earned income (defined below). If none, enter -0-. 1.  
2. Additional amount 2. $300
3. Add lines 1 and 2. 3.  
4. Minimum standard deduction. 4. $850
5. Enter the larger of line 3 or line 4. 5.  
6. Enter the amount shown below for your filing status.    
  • Single or Married filing separately— $5,150 6.  
  • Married filing jointly or Qualifying
widow(er) with dependent child—$10,300 		   
  • Head of household—$7,550    
7. Standard deduction.    
  a. Enter the smaller of line 5 or line 6. If born after January 1, 1942, and not blind, stop here. This is your standard deduction. Otherwise, go on to line 7b. 7a.  
b. If born before January 2, 1942, or blind, multiply $1,250 ($1,000 if married or qualifying widow(er) with dependent child) by the number in the box above. 7b.  
  c. Add lines 7a and 7b. This is your standard deduction for 2006. 7c.  
         

Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. It also includes any amount received as a scholarship that you must include in your income.

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