The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. There are two ways to pay as you go.

This publication explains both of these methods. It also explains how to take credit on your return for the tax that was withheld and for your estimated tax payments.

If you did not pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty. Generally, the IRS can figure this penalty for you. This underpayment penalty, and the exceptions to it, are discussed in chapter 4.

You should consider the items in this section when figuring the amount of your tax withholding (see chapter 1) or estimated tax payments (see chapter 2) for 2009. Unless otherwise stated, see Publication 553, Highlights of 2008 Tax Changes, for more information.

Definition of a qualifying child revised. The following changes to the definition of a qualifying child have been made.

Divorced or separated parents. A noncustodial parent claiming an exemption for a child can no longer attach certain pages from a divorce decree or separation agreement executed after 2008. The noncustodial parent will have to attach Form 8332 or a similar statement signed by the custodial parent whose only purpose is to release a claim for exemption.

Differential wage payments subject to withholding. Beginning in 2009, differential wage payments made to active members of the uniformed services are treated as wages and income tax must be withheld. For more details, see Publication 15, Employer's Tax Guide.

Certain unemployment compensation excluded from income.  You can exclude from income the first $2,400 of unemployment compensation you receive.

Economic recovery payment to recipients of social security, supplemental social security, railroad retirement benefits, and veterans disability compensation or pension benefits. If you receive any of the above benefits, you will receive an economic recovery payment of $250. This is not included in your income.

Qualified small business stock. The exclusion of gain from the sale of qualifying small business stock is increased to 75% for stock acquired after February 17, 2009, and before January 1, 2011.

Limit on exclusion of gain on sale of main home. Generally, gain from the sale of your main home is no longer excludable from income if the gain is allocable to periods after 2008 when neither you nor your spouse (or your former spouse) used the property as a main home.

Retirement savings plans. The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs). IRA deduction expanded. You may be able to take an IRA deduction if you were covered by a retirement plan at work and your 2009 modified AGI is less than $65,000 ($109,000 if married filing jointly or a qualifying widow(er)). If your spouse was covered by a retirement plan but you were not, you may be able to take an IRA deduction if your modified AGI is less than $176,000. Elective salary deferrals. The maximum amount you can defer under all plans generally is limited to $16,500 ($11,500 if you have only SIMPLE plans; $19,500 for section 403(b) plans if you qualify for the 15-year rule). The catch-up contribution limit for individuals age 50 or older at the end of the year is increased to $5,500 (except for section 401(k)(11) plans and SIMPLE plans, for which this limit remains unchanged). Retirement savings contributions credit (saver's credit). For 2009, the income limits have increased and you may be able to claim this credit if your modified AGI is not more than $27,750 ($55,500 if married filing jointly, $41,625 if head of household). Temporary waiver of certain required minimum distribution rules. No minimum distribution is required from your IRA or employer-provided qualified retirement plan for 2009. For more information, see Publication 575, Pension and Annuity Income, or Publication 590.

Increased standard deduction. You may be able to increase your standard deduction by the following amounts.

Standard mileage rates.  The standard mileage rate for the cost of operating your car is:

Personal casualty and theft loss. A personal casualty or theft loss must exceed $500 to be allowed. This is in addition to the 10%-of-AGI limit that generally applies to the net loss.

Alternative minimum tax (AMT) exemption amount increases. The AMT exemption amount is increased to $46,700 ($70,950 if married filing jointly or a qualifying widow(er); $35,475 if married filing separately).

Tax on child's investment income.  Generally, Form 8615 will be required to figure the tax for children with investment income of more than $1,900.

Making work pay credit. You can claim a refundable credit of up to $400 ($800 if married filing jointly) if you work. You can claim the credit if you are an employee or self-employed. The credit is 6.2% of your earned income, which includes nontaxable combat pay, up to the $400 (or $800) limit. The credit is phased out if your modified AGI is more than $75,000 ($150,000 if married filing jointly). For more details, see Worksheet 2-9 in chapter 2.

Hope education credit expanded. For 2009 and 2010, the maximum credit is $2,500, the credit is available for the first 4 years of post-secondary education, and 40% of the credit is refundable. The increased benefits will be phased out if your modified AGI is above $80,000 ($160,000 if married filing jointly).

Qualified education expenses under a qualified tuition program (QTP). During 2009 and 2010, qualified education expenses will include the purchase of computer technology, equipment, or Internet access and related services if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution. (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature.)

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

New for 2009 is an increase in the amount of earned income credit for taxpayers with three or more qualifying children.You can elect to include combat pay as earned income for purposes of claiming the EIC.The maximum investment income you can have and still get the credit has increased to $3,100.For more information, see Publication 596, Earned Income Credit (EIC).

Additional child tax credit. The earned income threshold generally needed to qualify for the additional child tax credit is reduced to $3,000.

Credit to certain government retirees. If you are a government retiree and you did not receive an economic recovery payment as a recipient of social security, supplemental social security, railroad retirement, and veterans disability compensation or pension benefits, you are allowed a credit of $250 ($500 if both you and your spouse are government retirees and you file jointly). The credit is refundable. See Worksheet 2-9 in chapter 2.

Nonbusiness energy property credit. This credit, which expired after 2007, has been reinstated. The amount of the credit has increased from 10% to 30%, limited to a $1,500 total amount for 2009 and 2010 installations. It also has been expanded to include certain asphalt roofs and stoves that burn biomass fuel.

Residential energy efficient property credit. The 30% credit for qualified solar hot water property, geothermal heat pumps, and wind energy property is no longer limited to $2,000 per year. However, there is a $500 credit limit on qualified fuel cell property expenditures.

Increased alternative fuel vehicle refueling property credit. The credit for alternative fuel vehicle fueling property increases to 50%. For property placed in service during 2009 and 2010 at your main home, the credit limit increases to $2,000.

Credit for qualified plug-in electric vehicles. The electric vehicle credit is now limited to plug-in electric vehicles. The maximum credit for a qualified vehicle acquired after February 17, 2009, is $2,500.

Plug-in conversion credit. A new credit is available for converting a motor vehicle to a qualified plug-in electric drive motor vehicle. The maximum credit is $4,000, and will be claimed as part of the alternative motor vehicle credit.

Build America tax credit bonds. The credit available to taxpayers from Build America bonds must be included in income as interest. Any unused credit is refundable.

First-time homebuyer credit. You may be able to claim a refundable credit of up to $8,000 if you are a first-time homebuyer and buy a principal residence after December 31, 2008, and before December 1, 2009.

Increased health coverage tax credit. For individuals who are eligible trade adjustment assistance (TAA) recipients, alternative TAA recipients, or eligible Pension Benefit Guaranty Corporation pension recipients, the credit for the cost of health insurance increases. This credit also is available to eligible TAA recipients who are not currently enrolled in a training program.

Decreased estimated tax payment for certain small businesses. For certain small businesses, your required estimated tax payment for the year is the lesser of 90% of your 2008 tax or 90% of your estimated 2009 tax. This rule applies to individuals who satisfy all of the following:

Social security (FICA) tax.  Generally, each employer for whom you work during the tax year must withhold social security tax up to the annual limit.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that otherwise would be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.