Question

Sam's (single taxpayer) 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?

Answer 1

Answer:

$33,000

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).

Explanation: