Mutiple Choice Practice QuestionEstimated Tax Payments
Sam's year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of year 3 estimated tax payments that Sam can make?
a. $30,000
b. $33,000
c. $45,000
d. $50,000
Solution:
Choice "b" is correct.
RULE: To avoid penalties, if a taxpayer owes $1,000 or more in tax payments beyond withholdings, such taxpayer will need to have paid in for taxes the lesser of:
90% of the current year's tax ($50,000 x 90%) = $45,000, or
100% of the previous year's tax ($30,000 x 100%)=$30,000
However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year, 110% of the prior year's tax liability is used to compute the safe harbor for estimated payments. (Previous year's tax $30,000 x 110% = $33,000).
Choice "a" is incorrect. $30,000 is 100% of last year's tax. This would be sufficient if the previous year's income were $150,000 or less.
Choice "c" is incorrect. $45,000 is 90% of this year's tax, which is sufficient, but we are looking for the minimum amount.
Choice "d" is incorrect. $50,000 is 100% of the current year's tax, which is sufficient, but more than required.
(Source: Questions and answers published by AICPA) |
