ExpertMedium1 markMultiple Choice
CPA · Question 05 · Area I: Individual Compliance and Planning
A taxpayer is subject to the safe harbor rules for estimated tax payments. Their Year 1 Adjusted Gross Income (AGI) was $160,000, and their Year 1 tax liability was $30,000. For Year 2, they project a tax liability of $40,000. To avoid the underpayment penalty for Year 2 without regard to the annualized income installment method, what is the minimum total estimated tax payment required?
A taxpayer is subject to the safe harbor rules for estimated tax payments. Their Year 1 Adjusted Gross Income (AGI) was $160,000, and their Year 1 tax liability was $30,000. For Year 2, they project a tax liability of $40,000. To avoid the underpayment penalty for Year 2 without regard to the annualized income installment method, what is the minimum total estimated tax payment required?
Answer options:
A.
$30,000
B.
$36,000
C.
$33,000
D.
$44,000
How to approach this question
Check AGI. If > $150k, prior year safe harbor is 110%. Compare 110% of Prior Year Tax vs 90% of Current Year Tax. The lesser is the required amount.
Full Answer
C.$33,000✓ Correct
IRC §6654. General rule: Lesser of 90% of current tax or 100% of prior tax. Exception: If prior year AGI > $150,000, use 110% of prior tax. <br/>Option 1: 90% of Year 2 tax = 0.90 * 40,000 = $36,000.<br/>Option 2: 110% of Year 1 tax = 1.10 * 30,000 = $33,000.<br/>The minimum required is the lesser amount: $33,000.
Common mistakes
Using 100% of prior year tax instead of 110% for high income earners.
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