This section summarizes important changes that could affect your estimated tax payments for 2007. More information on these and other changes can be found in Publication 553.

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

The election to include combat pay as earned income for purposes of claiming the EIC is extended through 2007. The maximum investment income you can have and still get the credit has increased to $2,900. 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. Traditional IRA deduction limits increased. You may be able to take an IRA deduction if you were covered by a retirement plan at work and your 2007 modified adjusted gross income (AGI) is less than $62,000 ($103,000 if married filing jointly or a qualifying widow(er)). Limit on elective deferral increases. The maximum elective deferral for 2007 is $15,500. For a SIMPLE plan, this amount is $10,500. Retirement savings contributions credit. For 2007, you may be able to claim this credit if your modified AGI is not more than $26,000 ($52,000 if married filing jointly, $39,000 if head of household). Catch-up contributions in certain employer bankruptcies. For 2007, 2008, and 2009, you may be able to deduct catch-up contributions of up to $3,000 each year to your IRA if you participated in a qualified cash or deferred arrangement (section 401(k) plan) of an employer who was a debtor in bankruptcy proceedings. For more details, see chapter 1 in Publication 590.

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, residential energy credits, mortgage interest credit, and 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).

Credit for prior year minimum tax. . If you paid AMT before 2004 that you have not been able to credit against your regular tax liability, you may be able to claim a refundable tax credit for part of the AMT. To see if you qualify and to compute the refundable amount of your credit, see Publication 553.

Standard mileage rates.  Beginning in 2007, the standard mileage rate for the cost of operating your car is:

Deduction for domestic production activities. . For 2007, the deduction rate will increase to 6%.

Deduction for qualified mortgage insurance premiums. . A homeowner who obtained a qualified mortgage in 2007, and whose AGI is less than $110,000 ($55,000 if married filing separately), may be able to deduct some of the mortgage insurance premiums paid during the year (as if they were mortgage interest) as an itemized deduction.

Health savings account (HSA).  Beginning in 2007:

For more information about these and other changes to HSAs, see Publication 553.

Expired tax benefits.  The following tax benefits have expired and will not apply for 2007. Certain relief granted for hurricanes Katrina, Wilma, and Rita.

Other benefits.

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

Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough 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 on page 22), you may be charged a penalty even if you are due a refund when you file your tax return. For information on when the penalty applies, see chapter 4.

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

If you owed additional tax for 2006, you may have to pay estimated tax for 2007.

General Rule

You must pay estimated tax for 2007 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2007, 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 2007 tax return, or

   2. 100% of the tax shown on your 2006 tax return. Your 2006 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.

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 2007, Jane, who files as head of household, uses Figure 2-A and the following information.

Expected AGI for 2007	$78,725
AGI for 2006	$73,700
Tax shown on 2006 return	$10,504
Tax expected to be shown on 2007 return	$11,501
Tax expected to be withheld in 2007	$10,400

Jane's answer to the chart's first question is YES; she expects to owe at least $1,000 for 2007 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 2007 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 2007. 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 2006 return ($10,504). Jane must pay estimated tax for 2007.

Example 3.

The facts are the same as in Example 2, except that the tax shown on Jane's 2006 return was $8,000. Because she expects to have more than $8,000 withheld in 2007 ($8,500), her answer to the chart's third question is YES. Jane does not need to pay estimated tax for 2007.

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

Figure 2-A. Do You Have To Pay Estimated Tax? Summary: This is the flowchart used to determine if a taxpayer has to make estimated tax payments.Start. This is the start of the flowchart.Decision (1). Will you owe $1000 or more for 2007 after subtracting income tax withholding and credits from your total tax? (Do not subtract any estimated tax payments.)

IF Yes Continue To Decision (2)

IF No Continue To Process (a)

Decision (2). Will your income tax withholding and credits be at least 90% (66 2/3% for farmers and fishermen) of the tax shown on your 2007 tax return?

IF Yes Continue To Process (a)

IF No Continue To Decision (3)

Decision (3). Will your income tax withholding and credits be at least 100% (see Footnote) of the tax shown on your 2006 tax return? Note: Your 2006 return must have covered a 12-month period.Footnote: 110% if less than two-thirds of your gross income for 2006 and 2007 is from farming or fishing and your 2006 was more than $150,000 ($75,000 if your filing status for 2007 is married filing a separate return).

IF Yes Continue To Process (a)

IF No Continue To Process (b)

Process (a). You are NOT required to pay estimated tax.

Continue To End

Process (b). You MUST make estimated tax payment(s) by the required due date(s). See When To Pay Estimated Tax.

Continue To End

End. This is the end of the flowchart.

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

When figuring your 2007 estimated tax, it may be helpful to use your income, deductions, and credits for 2006 as a starting point. Use your 2006 federal tax return as a guide. You can use Form 1040-ES to figure your estimated tax. Nonresident aliens use Form 1040-ES (NR) to figure estimated tax.

You must make adjustments both for changes in your own situation and for recent changes in the tax law. For 2007, there are several changes in the law. Some of these changes are discussed under What's New for 2007 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.

2007 Estimated Tax Worksheet

Use the worksheet (Figure 2-B), on page 20, to help guide you through the information about completing the 2007 Estimated Tax Worksheet. You also will find a blank worksheet on page 32.

Expected AGI—Line 1

Your expected AGI for 2007 (line 1) is your expected total income minus your expected adjustments to income.

Total income.   Include in your total income all the income you expect to receive during the year, even income that is subject to withholding. However, do not include income that is tax exempt.

  Total income includes all income and loss for 2007 that, if you had received it in 2006, would have been included on your 2006 tax return in the total on line 22 of Form 1040, line 15 of Form 1040A, or line 4 of Form 1040EZ.

Social security and railroad retirement benefits. If you expect to receive social security or tier 1 railroad retirement benefits during 2007, use Worksheet 2-1, on page 33, to figure the amount of expected taxable benefits you should include on line 1.

Adjustments to income.   Be sure to subtract from your expected total income all of the adjustments you expect to take on your 2007 tax return. If you are using your 2006 return as a guide and filed Form 1040, your adjustments for 2006 were on lines 23-35, plus any write-in adjustments on line 36. If you filed Form 1040A, your 2006 adjustments were on lines 16-19.

Self-employed. If you expect to have income from self-employment, use Worksheet 2-2, on page 33, to figure your expected self-employment tax and your deduction for one-half of your self-employment tax. Include the amount from line 10 of Worksheet 2-2 in your expected adjustments to income. If you file a joint return and both you and your spouse have net earnings from self-employment, each of you must complete a separate worksheet.

Expected Taxable Income— Lines 2-5

Reduce your expected AGI for 2007 (line 1) by either your expected itemized deductions or your standard deduction and by your exemptions (lines 2 through 5).

Itemized deductions—Line 2.   If you expect to claim itemized deductions on your 2007 tax return, subtract them from your expected AGI.

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

Phaseout of itemized deductions. For 2007, your total itemized deductions may be reduced if your AGI is more than $156,400 ($78,200 if married filing separately). If you expect your AGI to be more than that amount, use Worksheet 2-3, on page 34, to figure the amount to enter on line 2.

Standard deduction—line 2.   If you expect to claim the standard deduction on your 2007 tax return, subtract it from your expected AGI. Use the 2007 Standard Deduction Tables, on page 42, 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 AGI, reduce the amount remaining by $3,400 for each exemption you expect to take on your 2007 tax return. If another person (such as your parent) can claim an exemption for you on his or her tax return, you cannot claim your own personal exemption. This is true even if the other person will not claim your exemption or the exemption will be reduced or eliminated under the phaseout rule.

Reduction of personal exemption amount. For 2007, your deduction for personal exemptions is reduced if your AGI is larger than the AGI shown below for your filing status.

Single	$156,400
Married filing jointly or qualifying widow(er)	$234,600
Married filing separately	$117,300
Head of household	$195,500

If you expect your AGI to be more than that amount, use Worksheet 2-4, on page 34, to figure the amount to enter on line 4.

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Fig. 2-B. 2006 Estimated Tax Worksheet

2007 Estimated Tax Worksheet. Summary: This is an example of the worksheet used to determine the amount of estimated taxes the taxpayer needs to pay. The line items to be completed are:

“1. you expect in 2007 (see instructions below)” field

“2. If you plan to itemize deductions, enter the estimated total of your itemized deductions. Caution: If line 1 above is over $156,400 ($78,200 if married filing separately), your deduction may be reduced. See Pub. 505 for details. If you do not plan to itemize deductions, enter your standard deduction from page 1.” field

“3. Subtract line 2 from line 1” field

“4. Exemptions. Multiply $3,400 by the number of personal exemptions. Caution: See Pub. 505 to figure the amount to enter if line 1 above is over: $234,600 if married filing jointly or qualifying widow(er); $195,500 if head of household; $156,400 if single; or $117,300 if married filing separately” field

“5. Subtract line 4 from line 3” field

“6. Tax. Figure your tax on the amount on line 5 by using the 2007 Tax Rate Schedules on page 5. Caution: If you have qualified dividends or a net capital gain, see Pub. 505 to figure the tax” field

“7. Alternative minimum tax from Form 6251” field

“8. Add lines 6 and 7. Also include any tax from Forms 4972 and 8814 and any recapture of the education credits (see instructions below)” field

“9. Credits (see instructions below). Do not include any income tax withholding on this line” field

“10. Subtract line 9 from line 8. If zero or less, enter 0” field

“11. Self-employment tax (see instructions below). Estimate of 2007 net earnings from self-employment $(blank text field); if $97,500 or less, multiply the amount by 15.3%; if more than $97,500, multiply the amount by 2.9%, add $12,090.00 to the result, and enter the total. Caution: If you also have wages subject to social security tax, see Pub. 505 to figure the amount to enter” field

“12. Other taxes (see instructions below)” field

“13a. Add lines 10 through 12” field

“13b. Earned income credit, additional child tax credit, and credits from Form 4136 and Form 8885” field

“13c. Total 2007 estimated tax. Subtract line 13b from line 13a. If zero or less, enter 0” field

“14a. Multiply line 13c by 90% (66 2/3% for farmers and fishermen)” field

“14b. Enter the tax shown on your 2006 tax return (110% of that amount if you are not a farmer or fisherman and the shown on that return is more than $150,000, or, if married filing separately for 2007, more than $75,000)” field

“14c. Required annual payment to avoid a penalty. Enter the smaller of line 14a or 14b. Caution: Generally, if you do not prepay (through income tax withholding and estimated tax payments) at least the amount on line 14c, you may owe a penalty for not paying enough estimated tax. To avoid a penalty, make sure your estimate on line 13c is as accurate as possible. Even if you pay the required annual payment, you may still owe tax when you file your return. If you prefer, you can pay the amount shown on line 13c. For details, see Pub. 505.” field

“15. Income tax withheld and estimated to be withheld during 2007 (including income tax withholding on pensions, annuities, certain deferred income, etcetera)” field

“16. Subtract line 15 from line 14c. (Note: If zero or less or line 13c minus line 15 is less than $1,000, stop here. You are not required to make estimated tax payments.)” field

“17. If the first payment you are required to make is due April 16, 2007, enter 1/4 of line 16 (minus any 2006 overpayment that you are applying to this installment) here, and on your estimated tax payment voucher(s) if you are paying by check or money order. (Note: Household employers, see instructions below.)” field

Expected Taxes and Credits—Lines 6-13c

After you have figured your expected taxable income (line 5), follow the steps below to figure your expected taxes, credits, and total tax for 2007. Most people will have entries for only a few of these steps. However, you should check every step to be sure you do not overlook anything.

Step 1.   Figure your expected income tax (line 6). Generally, you will use the 2007 Tax Rate Schedules, found on page 41 or in the instructions to Form 1040-ES, to figure your expected income tax. However, see below for situations where you must use a different method to compute your estimated tax.

Tax on investment income of child under age 18.   You must use a special method to figure tax on the income of a child under age 18 who has more than $1,700 of investment income. See Tax for Children Under Age 18 Who Have Investment Income of More Than $1,700 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.

Tax on 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).

Tax on capital gain and qualified dividends. If you expect to have a net capital gain or qualified dividends, use Worksheet 2-5, on page 35, to figure your tax.

Tax if excluding foreign earned income or housing. If you expect to claim the foreign earned income exclusion or the housing exclusion on Form 2555 or Form 2555-EZ, use Worksheet 2-6, on page 36, to figure your estimated tax.

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

1. Your tax on line 6;

2. Your expected alternative minimum tax (AMT) from Form 6251, Alternative Minimum Tax—Individuals, on line 7;

3. Your expected additional taxes from Form 8814, Parents' Election To Report Child's Interest and Dividends, and Form 4972, Tax on Lump-Sum Distributions (line 44, boxes a and b, of the 2006 Form 1040); and

4. Any recapture of education credits.

Step 3.   Subtract your expected credits (line 9). If you are using your 2006 return as a guide and filed Form 1040, your total credits for 2006 were shown on line 56. If you filed Form 1040A, your total credits for 2006 were on line 34.

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

Step 4.   Add your expected self-employment tax (line 11). You already should have figured your self-employment tax (see Self-employed under Expected AGI—Line 1, on page 20).

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

  Other taxes include:

1. Taxes on early distributions from:

   1. An IRA or other qualified plan,

   2. An annuity, or

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

2. Advance earned income credit payments,

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

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

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

4. Amounts written in on Form 1040, line 63.

  Do not include tax on recapture of a federal mortgage subsidy, tax on golden parachute payments, excise tax on insider stock compensation from an expatriated corporation, or uncollected employee social security and Medicare or RRTA tax on tips or group-term life insurance.

  If you filed a 2006 Form 1040A, your only other tax was any advance earned income credit payments on line 36.

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

  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 2006 Form 1040A, line 40a, and the additional child tax credit is shown on line 41.

  The result of steps 1 through 6 is your total estimated tax for 2007 (line 13c).

Required Annual Payment— Line 14c

On lines 14a through 14c, figure the total amount you must pay for 2007, through withholding and estimated tax payments, to avoid paying a penalty.

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

1. 90% of your total expected tax for 2007, or

2. 100% of the total tax shown on your 2006 return. Your 2006 tax return must cover all 12 months.

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

Higher income taxpayers.   If your AGI for 2006 was more than $150,000 ($75,000 if your filing status for 2007 is married filing separately), substitute 110% for 100% in (2) above. This rule does not apply to farmers and fishermen.

For 2006, 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 2006 or 2007 is from farming or fishing, your required annual payment is the smaller of:

1. 66⅔% (.6667) of your total tax for 2007, or

2. 100% of the total tax shown on your 2006 return. (Your 2006 tax return must cover all 12 months.)

  For definitions of “gross income from farming” and “gross income from fishing,” see Farmers and Fishermen, under Special Rules, starting on page 18.

Total tax for 2006.   Your 2006 total tax on Form 1040 is the amount on line 63 reduced by the total of the following.

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

2. The following amounts included on line 60.

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

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

3. The following amounts included on line 63.

   1. Any recapture of a federal mortgage subsidy.

   2. Any tax on golden parachute payments.

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

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

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

  On Form 1040A, it is the amount on line 37 reduced by the amount on lines 40a and 41. On Form 1040EZ, it is the amount on line 11 reduced by the amount on line 8a.

Example.   Jeremy Martin's total tax on his 2006 return was $43,203, and his expected tax for 2007 is $71,253. His 2006 AGI was $180,000. Because Jeremy had more than $150,000 of AGI in 2006, he figures his required annual payment as follows. He determines that 90% of his expected tax for 2007 is $64,128 (.90 × $71,253). Next, he determines that 110% of the tax shown on his 2006 return is $47,523 (1.10 x $43,203). Finally, he determines that his required annual payment is $47,523, the smaller of the two.

Total Estimated Tax Payments Needed—Line 16a

Use lines 15 and 16a to figure the total estimated tax you must pay for 2007. Subtract your expected withholding from your required annual payment. You usually must pay this difference in four equal installments. (See When To Pay Estimated Tax, on this page, and How To Figure Each Payment, on page 23.)

You do not have to pay estimated tax if:

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

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

Withholding.   Your expected withholding for 2007 (line 15) includes the income tax you expect to be withheld from all sources (wages, pensions and annuities, etc.). It also includes excess social security and railroad retirement tax you expect to be withheld from your wages.

  For this purpose, you will have excess social security or tier 1 railroad retirement tax withholding for 2007 only if your wages from two or more employers are more than $97,500.

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.