Standard Deduction or Itemized Deductions and Exemptions

Once you estimate your adjusted gross income, you reduce this by the standard deduction amount applicable for the year, or your estimated itemized deductions.  There is another worksheet in Publication 505 to determine any limitation that may apply on your itemized deductions, based on the level of your adjusted gross income.  Then you would determine your personal and dependent exemptions for the year to arrive at your taxable income. 

Tax

Based on your taxable income, you can determine your estimated tax by using the tax rate schedules in the Form 1040-ES package or in Publication 505.  If you expect to have a net capital gain, or qualified dividend income, the tax rate schedules do not apply, and you will need to use the separate worksheet in Publication 505 to figure your tax.  Also, if you are subject to the alternative minimum tax you will have to make a separate calculation on Form 6251 and add this amount to your estimated tax.

Credits

From your total estimated tax amount, you would subtract any special credits for which you may be eligible, and then, if you are self-employed, you would add your expected self-employment tax (calculated using the worksheet mentioned above, if you choose), and would also add any other special taxes you may owe, such as taxes on early distributions from IRA or annuity plans.  Finally, you would subtract your expected earned income credit, additional child tax credit, and any other applicable credits, to arrive at your total estimated tax. 

Required Annual Payment

The following lines on the worksheet apply the general rule of 90% of your current year estimated tax (with the exceptions for farming and fishing income (66 2/3%), and higher income taxpayers (110%)), and 100% of last year’s tax.  The result of these calculations will show the “required annual payment to avoid a penalty”.  From this amount, you subtract the estimated amount of tax that will be withheld, and the difference, if any, is the amount you will have to cover with estimated tax payments.