ExpertMedium1 markMultiple Choice
CPA · Question 37 · Area I: Individual Compliance and Planning
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)?
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:
A.
$40,000
B.
$45,000
C.
$44,000
D.
$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
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.
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