Answer:
1. Yes
2. $7,400
Explanation:
Basic Rules For Estimated Tax For Individuals
Any individual who has estimated tax for the year of $1,000 or more and whose withholding does not equal or exceed the “required annual payment” must make quarterly payments. Otherwise, a penalty may be assessed. The required annual payment is the smaller of the following amounts:
1.Ninety percent of the tax shown on the current year's return.
2.One hundred percent of the tax shown on the preceding year's return (the return must cover the full 12 months of the preceding year). If the AGI on the preceding year's return exceeds $150,000 ($75,000 if married filing separately), the 100% requirement is increased to 110%.
Are Paula and Simon required to increase their withholdings or make estimated tax payments this year to avoid the underpayment penalty?
Following the basic rules above, yes, Paula and Simon have to increase their withholdings or make estimated tax payments this year to avoid the underpayment penalty.
If so, how much?
Amount of income tax liability = $218,000
In general, taxpayers must pay at least 90 percent of their tax bill during the year to avoid an underpayment penalty when they file.
Therefore Minimum estimated payments-90% : $218,000 * 0.9 = $196,200
110% of the preceding year's tax: $182,000 * 1.10 = $200,200
According to the basic rules the required annual payment is the smaller which is $196,200.
Tax withholding from their employers = $188,800
Estimated tax payments required = $196,200 - $188,800 = $7,400
