Question

This year, Paula and Simon (married filing jointly) estimate that their tax liability will be $218,000. Last year, their total tax liability was $182,000. They estimate that their tax withholding from their employers will be $188,800. Are Paula and Simon required to increase their withholdings or make estimated tax payments this year to avoid the underpayment penalty? If so, how much?

Answer 1

Paula and Simon should not face an underpayment penalty as long as their withholdings or estimated payments are at least equal to their last year's tax liability, which was $182,000. Since their estimated withholdings are $188,800, they are already exceeding that threshold.

Step-by-step explanation:

Paula and Simon, who are married and file jointly, should review the IRS rules regarding underpayment penalties to avoid potential issues. Based on the information provided, their estimated tax liability for this year is $218,000, with withholdings of $188,800.

The IRS generally requires taxpayers to pay at least 90% of their tax liability during the year or 100% of the previous year's tax liability to avoid an underpayment penalty. Because their estimated withholding is less than their expected tax liability, they would need to either increase their withholdings or make estimated tax payments.

Given that their tax liability last year was $182,000, one way to avoid the penalty would be to ensure their withholdings and/or estimated payments equal at least that amount. Since they are already estimated to have $188,800 in withholdings, they should be covered as this exceeds the threshold of what they paid the previous year.

Therefore, as long as their withholding is equal to or greater than last year's tax, they should not incur an underpayment penalty, based on these general guidelines.

Answer 2

1. Yes

2. $7,400

Step-by-step 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