Tax Withholding and Estimated Tax Flashcards
The tax shown on Janet’s 20X1 return was $11,000. Her expected tax liability for 20X2 is $12,000. Tax expected to be withheld in 20X2 is $10,900. Which of the following statements is true?
-Janet will be subject to the estimated tax penalty if she does not adjust her withholding or make estimated tax payments.
-Janet is not subject to the estimated tax penalty because her withholding is more than 90% of her 20X2 tax liability.
-Janet is not subject to the estimated tax penalty because her withholding is more than 90% of the tax shown on her 20X1 return.
-Janet must pay an estimated tax penalty because she owes more than $1,000 in tax.
20X2 tax ($12,000 expected tax liability for 20X2 × 90% = $10,800).
Estimated tax liability exists when both of the following conditions exist:
An individual will owe at least $1,000 in tax, after subtracting withholding and credits, and
Withholding and credits will be less than the smaller of one of the following:
90% of the tax to be shown on this year’s tax return, or
100% of the tax shown on last year’s tax return (110% if AGI more than $150,000).
Susan, a single filer, started a home-based dress business on March 1, 20X2. She was an employee and paid income taxes of $6,000 for 20X1. Susan’s business had net income of $0, $9,000, $11,000, and $15,000 respectively for each of the quarters in 20X2. Susan’s total tax liability for 20X2 was $5,500. Her first payment of estimated taxes is due:
April 15, 20X2
No estimates due if Susan files her return by January 31, 20X3
June 15, 20X2
Susan’s tax liability for 20X1 exceeds 90% of her 20X2 tax liability so no estimates are required to be paid
Estimated tax payments are due by the 15th day of the 4th, 6th, 9th and 1st month of the following year. These payments reflect the income earned in the quarter prior to the due date. Her first estimated payment must be made by June 15th for income earned in the second quarter.
Estimated tax liability exists when both of the following conditions exist:
An individual will owe at least $1,000 in tax, after subtracting withholding and credits, and
Withholding and credits will be less than the smaller of one of the following:
90% of the tax to be shown on this year’s tax return, or
100% of the tax shown on last year’s tax return (110% if AGI more than $150,000).
In 20X1, Sarah Scott earned income of $60,000 and paid income taxes in a timely fashion of $19,000. In 20X2, Scott had earned income of $68,000 and her total income tax was $23,000. She had made timely quarterly payments during the year that amounted to $20,000. In connection to the possibility that she is subject to a penalty for underpaying her income taxes in 20X2, which of the following statements is true?
She has no penalty because she paid more than her tax for the previous year.
She has a penalty because she paid only 87 percent of her current income tax.
She has no penalty because she paid 87 percent of her current income tax.
She has a penalty because she owes over $2,500 at the end of the year.
Unless a taxpayer has a high level of income, the penalty can be avoided by paying an amount equal to or greater than 100 percent of the tax in the previous year, 90 percent of the taxes due for the current year or 90% of tax determined throughout the year by annualizing income quarterly. Although Scott did not pay 90 percent of the current tax of $23,000, she did pay more than her tax for the previous year. If either limit is met, there is no penalty for underpayment during the year.
Estimated tax Penalty
To avoid penalty they must pay the smaller of 90% of the current year’s tax due or 100% (110% if AGI over $150,000) of tax on last year’s return.
90% of current year’s tax due of $43,960 is $39,564. Subtract their current year withholding of $36,960 to arrive at the required estimated tax payments of $2,604.
90% of current year’s tax due of $39,564 is smaller than 110% (since AGI over $150,000) of tax on last year’s return ($42,000 prior year tax).
Which of the following is subject to withholding for a U.S resident?
Interest
Rent
Royalties
None of the above
answer : None of the above
Income from dividends, interest, capital gains, rent, royalties, and self-employment is NOT subject to withholding. A taxpayer with income from these sources must make estimated quarterly payments.
