The guide also incorrectly stated that Form 1040ES contains a space to apply some or all of any 1987 overpayment toward 1988 taxes. To apply a 1987 overpayment toward 1988, the taxpayer must so indicate on the 1987 return when it is filed (and on the 1988 return when it is filed.) (Published 3/7/88)

If you expect to have income in 1988 that is not subject to withholding -- from self-employment, investments, pension payments, IRA or Keogh withdrawals, annuities -- you may be required to file an estimated tax return and make quarterly payments in order to comply with federal pay-as-you-go rules.

If you are employed by another, your employer is required to withhold federal income tax (and probably state tax as well) from your pay, unless you had shown on the Form W-4 you filed with your employer that the number of withholding allowances to which you are entitled exempts you from such withholding. But withholding is optional on distributions from retirement plans and commercial annuities.

The broader alternative minimum tax rules established by the 1986 tax law make it particularly important that potential alternative minimum tax liability be included in the determination of responsibility for paying estimated tax.

However, there are several exceptions to the basic rules for filing estimated tax. The requirement is waived if you meet any of these conditions:

You expect that your gross income for 1988 will not include more than $500 of taxable income not subject to withholding.

You expect that either your total tax liability or your net tax deficiency will be less than $500. ("Net tax deficiency" is the difference between your total tax liability and the total amount of tax withheld during the year.)

You estimate that total tax withheld during the year will equal at least 90 percent of your eventual tax liability. (This is an increase from the old "80 percent" rule.)

If you determine that an estimated tax return is required, you do not have to pay the full amount of the expected shortfall. You are required only to pay enough tax -- by withholding, estimated tax payments or a combination of both -- to equal 90 percent of the anticipated total tax liability.

But if your income is uncertain, you may want to make a payment of estimated tax sufficient to provide a cushion above that 90 percent minimum to avoid a penalty -- which is applied against the entire shortfall -- if your estimate turns out to be a little low.

There is another out. You can claim an exemption from the penalty for underpayment (on Form 2210) if the total tax paid during the year -- by withholding and estimating -- is at least equal to your total tax liability for the preceding year.

So for 1988 you need only assure that you pay enough tax during the year to equal your 1987 tax liability and you will escape the imposition of a penalty, without regard to the $500 or 90 percent limitations. (Of course, if you go this route, you should be prepared for the possibility of a large tax deficiency that will have to be paid in April 1989.)

You file estimated tax on Form 1040-ES. If you filed an estimated return for 1987 and are still living at the same address, you should receive a 1040-ES package for 1988 from the IRS in late January, with your name and address preprinted on the four quarterly reports.

If you didn't get a package in the mail and think you should file an estimated tax return for 1988, pick up the forms at any IRS office or request them by mail from the address in your instruction booklet.

The 1040-ES package includes a worksheet for estimating your tax deficiency plus four payment vouchers and mailing envelopes. You may pay the entire deficiency with the first voucher. But you will probably prefer to send one quarter of the total with each of the four vouchers, due April 15, June 15 and Sept. 15, 1988, and Jan. 16, 1989.

If you ended up with an overpayment of your 1987 tax, you may elect to have all or part of that overpayment applied against your 1988 estimate instead of being refunded. Each of the vouchers provides a space for claiming credit for the 1987 overpayment. You may take the entire overpayment on the first voucher or spread the total over the four vouchers.

If your estimate of tax liability changes during the year, simply adjust the remaining payments to correspond to the new balance due, whether it's more or less than your original estimate.

In the event that you're not liable for estimated tax on April 15 but later determine that you have become liable, file an initial 1040-ES on the next regular payment date and divide the total amount of the newly established deficiency over the remaining number of payments.

There is an alternative to filing estimated tax even though you expect a substantial amount of 1988 income not subject to witholding if you also receive wages or retirement pay that is subject to withholding.

You may file a new Form W-4 with your employer claiming a lesser number of withholding allowances, thus in effect directing him to withhold a larger amount of tax from your pay than would otherwise be required.

If you get down to zero allowances and want still more tax money withheld, you may specify an additional number of dollars to be withheld from each paycheck (if your employer agrees). You can thus ensure enough withholding to cover your entire tax liability (or at least 90 percent) and eliminate the need to file an estimate.

You should file a new W-4 if your tax situation changes -- a marriage or divorce, perhaps, the birth or adoption of a child, the purchase of a house which will generate large Schedule A deductions for interest and taxes (or the sale of a house and consequent loss of those deductions).

A new W-4 may be in order if you have been getting a large refund every year -- in effect an interest-free loan to Uncle Sam. Some people look at overwithholding as a form of enforced saving, sort of a "Christmas Club" with a payoff every spring. But if you can discipline yourself to cut down the withholding and put the extra dollars in savings someplace, it can be earning interest for you.

When you fill out a W-4, you may claim additional withholding allowances for almost any circumstance likely to reduce your tax bill at year-end, things like large itemized deductions or alimony payments, an IRA or Keogh deposit, a credit for child or dependent care expenses. (Don't confuse "withholding allowances" on the W-4 with "exemptions" on the tax return.)

But you may not claim more allowances than you are legally allowed. In any case, you should not reduce withholding below the proper level simply to generate more take-home pay during the year. You may find yourself with a large tax bill to pay next April -- and perhaps be subject to an interest penalty for underwithholding at the same time.