A taxpayer is underpaid on their estimated taxes for Year 1. Their Year 1 tax liability is $50,000. Their Year 0 (prior year) tax liability was $40,000. Their AGI in Year 0 was $160,000. What is the minimum timely payment required to avoid the underpayment penalty (Safe Harbor)?

Answer options:

$40,000

$45,000

$44,000

$50,000

How to approach this question

Safe Harbor Rules: 1. 90% of Current Tax. 2. 100% of Prior Tax (110% if Prior AGI > $150k). Pick the smaller number.

Full Answer

C.$44,000✓ Correct

$44,000

IRC §6654. General rule: Lesser of 90% current tax or 100% prior tax. Exception: If prior year AGI > $150,000, use 110% of prior tax. 110% of $40,000 = $44,000. 90% of $50,000 = $45,000. Lesser is $44,000.

Common mistakes

Using 100% of prior year tax despite AGI > $150k.

Question 36 All questions Question 38

Practice the full CPA TCP Practice Exam 2

68 questions · hints · full answers · grading

More questions from this exam

Q01In Year 1, an executive receives an Incentive Stock Option (ISO) to purchase 1,000 shares of stoc...Medium Q02A taxpayer is calculating their Alternative Minimum Tax (AMT) liability for Year 1. They claimed ...Medium Q03On January 1, Year 1, a corporation lends $500,000 to a shareholder at a 0% interest rate. The Ap...Hard Q04A U.S. citizen accepts a permanent assignment in France on January 1, Year 1. In Year 1, they ear...Medium Q05A 12-year-old child has $5,000 of interest income and no earned income in Year 1. The standard de...Medium

View all 68 questions →