ExpertMedium1 markMultiple Choice
CPA · Question 04 · Area I: Individual Compliance and Planning
An individual taxpayer had an AGI of $160,000 in Year 1 and a tax liability of $30,000. In Year 2, the taxpayer expects an AGI of $200,000 and a tax liability of $45,000. To avoid the underpayment penalty for Year 2 without paying more than necessary during the year, what is the minimum required annual estimated tax payment?
An individual taxpayer had an AGI of $160,000 in Year 1 and a tax liability of $30,000. In Year 2, the taxpayer expects an AGI of $200,000 and a tax liability of $45,000. To avoid the underpayment penalty for Year 2 without paying more than necessary during the year, what is the minimum required annual estimated tax payment?
Answer options:
A.
$30,000 (100% of prior year tax)
B.
$40,500 (90% of current year tax)
C.
$33,000 (110% of prior year tax)
D.
$45,000 (100% of current year tax)
How to approach this question
Check the AGI threshold ($150,000). Since AGI > $150k, the safe harbor is the lesser of 90% of current year tax or 110% of prior year tax.
Full Answer
C.$33,000 (110% of prior year tax)✓ Correct
IRC §6654(d)(1)(C) modifies the safe harbor for individuals with AGI over $150,000 in the preceding year. They must pay the lesser of 90% of the current year's tax ($45,000 * 0.9 = $40,500) or 110% of the prior year's tax ($30,000 * 1.1 = $33,000). $33,000 is the minimum.
Common mistakes
Using 100% of prior year tax despite high income; calculating 110% of current year tax; failing to compare the two safe harbor options.
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