I just retired last year. I don't have a company pension, and am too young to collect Social Security. So for the next few years, I'm going to be living on my investments. Do I now have to start making quarterly tax payments on my investment income to Uncle Sam?

The technology revolution has created a lot of young retired people, so I suppose there are a lot of folks out there in comparable situations. -- John Odendahl

John,

Lucky you. And to all you young retired people out there, I'm not embarrassed to say I'm jealous.

If you're going to start living off your investments and will no longer have income withheld from a payroll check, you may need to start making quarterly estimated tax payments to avoid getting hit with underpayment penalties.

Here's the typical rule to determine if you need to make these payments.

First figure out if you will owe tax of at least $1,000 or more after subtracting any withholding and credits. If not, you're free and clear.

If you will owe at least $1,000 -- and I'll assume this is your situation -- the next step is to determine if your tax withholding will cover at least 90% of your 2001 tax or 100% of your 2000 tax. (If your adjusted gross income is over $150,000, then you need to cover 110% of last year's tax bill.)

Generally, it's safer to use last year's tax bill as your litmus test, because if your estimation for 2000 is off, you'll owe those underpayment penalties. There is a great flow chart on page 44 of the

Internal Revenue Service's

Publication 17

-- Your Federal Income Tax

to walk you through this thought process.

In your case, you don't have any withholdings, so you need to make estimates.

Estimated tax payments are supposed to be paid in equal amounts throughout the year. Typically, you would determine the annual amount of tax you owe and pay 25% each quarter.

There are calculators on the Web that can help you figure out what you owe. For instance,

H&R Block's

site has a

withholding calculator that will give you a good estimate of what you will owe Uncle Sam based on your situation.

But in your case, you might not be able to ascertain your annual income at this point because your investment gains may not come equally throughout the year.

What if you made all your money in, say, the third quarter? If you pay all of your estimated taxes in that quarter, the IRS will assume you've underpaid for the first two quarters and will penalize you because your payments must be paid equally throughout the year.

Instead, try "annualizing" your income to minimize those penalties. Annualizing your income means that you assume that your year-to-date income is the amount you will make for a full calendar year. So if you made only $10,000 total in the first two quarters but you grossed $40,000 in the third quarter, your annualized amount would be around $66,000 ($50,000/three quarters times four quarters). By the end of the third quarter, the IRS will expect you to have paid in enough tax to cover 75% of the tax due on $66,000.

If you do annualize your income, you must file

Form 2210

-- Underpayment of Estimated Tax by Individuals, Estates and Trusts

, which will walk you through the calculation. The form also will prove to the IRS that your income hasn't been a steady stream throughout the year because it will document the quarterly flow of your income.

So get out your brokerage statements and calculate the income you've earned so far. Then do the same at the end of each quarter. Use Form 2210 or a withholding calculator to help you figure out how much you owe.

Remember,

your first-quarter 2001 estimated tax payment is due by midnight, April 16

and 25% of your estimated 2001 tax balance must be paid.

Yes, that is the same day your 2000 tax return is due.

Remember, you can charge with your

American Express

,

Discover

or

MasterCard

your estimated tax payments by calling 888-2PAY-TAX. Check out this previous

story for more details.

Who's the Best Broker at Tax Time?

In an effort to help readers stay at the forefront of the technological age during tax time,

Jamie Heller

and I would like to know which brokers offer options that help make your tax season less painful. Which brokers give away free tax software, like TurboTax? Which ones let customers download your statements directly into tax software? Let us know how you think your broker rates during tax time. Please send an email with your full name to

whatworks@thestreet.com.

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TSC Investor Forum aims to provide general investment information. It cannot and does not attempt to provide individual advice. All readers are urged to consult with a professional as needed about their individual circumstances.