How to Estimate Your Taxes

The federal tax system is based on the idea of “pay as you go.” You can’t just wait until April 15 each year to pay the taxes you owe. The law requires you to make payments throughout the year-through withholding on wages and certain other payments and/or by making quarterly estimated tax payments (the second estimated tax payment for 2008 is due on June 16, 2008). The goal is to get as close as possible to what you’ll ultimately owe.

• If you pay too much, you’ll have made an interest-free loan to Uncle Sam and you’ll have to wait until you file your return to recoup your advance.
• If you pay too little, you could owe a penalty.

How to do you know what you’ll owe at the end of the year? It can be difficult to predict because things can change throughout the year; you may unexpectedly receive income or change your circumstances (e.g., buy a home, have a child, get divorced). These events can increase or decrease your tax bill. Look at last year’s bill to get a basic idea of what you’ll owe this year if you expect things to remain about the same.

Adjust your withholding

If you’re subject to withholding on wages, you can adjust the amount of tax you pay so you won’t have to make separate