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>Essentially, what I'm asking is, if I am making $15000 less in 2002 than 2001 (due to not receiving a $15000 bonus this year) can I simply plan on estimating my taxes based on what I know my income for 2002 to be without my 2001 taxes entering into the picture? The reason is that my tax burden for 2002 (after working through 1040-ES 2002) is approx. $2200 whereas my taxes in 2001 was $5400. All that is required for me to get to $2200 is withholding another $150/mon on my W-4 for the rest of the year, however, to reach $5400 would cost me $$$$ each month.


Yes, your question is understandable and yes, you do not have to base your tax withholdings on your 2001 taxes. There are two ways of staying out of the IRS "penalty box":

1) Witholding enough so that the amount you owe isn't more than 10% of the total amount of tax, or,

2) Withholding enough so that the amount you've withheld over the year is at least 100% of your previous year's total amount of tax. (110% if your previous year's AGI is greater than $150,000 for MFJ.)

#1 requires you to prefigure your income tax which includes predicting factors such as what kind of capital gains and losses you think you'll have in the rest of the year and then making adjustments as the year goes on if your predictions don't hold correct. #2 is an easier number to shoot for since your previous year's total tax bill is known. Therefore, lots of folks aim for rule #2 and not rule #1 just to simplify things. The suggestion you are questioning was an example of rule #2. Given what you've said, since your total tax this year should be quite a bit lower than your tax was last year, you would be (as you noted) severely over-withholding if you aimed for rule #2. In your case, aiming for rule #1 seems to makes the most sense.

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