ExpertMedium1 markMultiple Choice
CPA · Question 07 · Area I: Individual Compliance and Planning
A taxpayer's Year 1 AGI was $160,000 and tax liability was $30,000. In Year 2, they expect an AGI of $200,000 and a tax liability of $45,000. What is the minimum estimated tax payment required for Year 2 to avoid underpayment penalties?
A taxpayer's Year 1 AGI was $160,000 and tax liability was $30,000. In Year 2, they expect an AGI of $200,000 and a tax liability of $45,000. What is the minimum estimated tax payment required for Year 2 to avoid underpayment penalties?
Answer options:
A.
$30,000 (100% of prior year tax)
B.
$33,000 (110% of prior year tax)
C.
$40,500 (90% of current year tax)
D.
$45,000 (100% of current year tax)
How to approach this question
Check the AGI threshold. Since prior year AGI > $150,000, the safe harbor is the lesser of 90% of current tax or 110% of prior tax.
Full Answer
B.$33,000 (110% of prior year tax)✓ Correct
B
Under IRC §6654, the safe harbor is the lesser of 90% of current year tax ($45,000 * 0.9 = $40,500) or 100% of prior year tax. However, if prior year AGI > $150,000, the prior year safe harbor becomes 110%. Prior tax $30,000 * 1.10 = $33,000. Since $33,000 < $40,500, the minimum payment is $33,000.
Common mistakes
Using 100% of prior year tax despite the high AGI.
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