Question

Ms. Jones is a retired partner in a law firm and has taxable income of $ 70,000 each year from the partnership, her RRIF and her investments. She expects to pay $ 25,000 in tax in respect of 2021. She paid $ 16,400 in tax in respect of 2020 and $ 15,300 in respect of 2019. No tax is withheld on any of this income.Which of the following is the minimum amount that Ms. Jones should pay for her 2021 quarterly income tax installments, in order to avoid any unnecessary interest costs?

a. 4 payments of $ 6,250
b. 2 payments of $ 4,100 and 2 payments of $ 6,250
c. 2 payments of $ 3,825 and 2 payments of $ 4,100
d. 2 payments of $ 3,825 and 2 payments of $ 4,375

Answer 1

To avoid unnecessary interest costs, Ms. Jones should choose option c, which suggests 2 payments of $3,825 and 2 payments of $4,100 for her quarterly income tax installments. This option totals $16,450, which is the closest to the $16,400 she paid last year.

Step-by-step explanation:

The student's question deals with calculating the minimum amount each installment Ms. Jones should pay in quarterly income tax installments for the year 2021 to avoid unnecessary interest costs. To avoid interest charges, individuals usually have to pay either 100% of the tax shown on the return for the previous year, or 90% of the tax for the current year, whichever is smaller. In Ms. Jones' case, 100% of the tax paid in 2020 is $16,400, and since no tax is withheld, she should aim to pay this amount spread over her quarterly payments to avoid interest.

Option a suggests 4 payments of $6,250 which totals $25,000, the amount she expects to pay for 2021. Option b suggests a combination of payments totaling $21,700. Option c offers payments totaling $16,450, very close to the tax paid in 2020. Option d suggests installments totaling $15,600. Therefore, the correct answer is option c: 2 payments of $3,825 and 2 payments of $4,100 which most closely match the requirements.