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Julie, being self-employed, is required to make estimated payments of her tax li

ID: 2577282 • Letter: J

Question

Julie, being self-employed, is required to make estimated payments of her tax liability for the year. Her tax liability for 2016 was $25,000, and her AGI was less than $150,000. For 2017, Julie ultimately determines that her income tax liability is $18,000. During the year, however, she made the following payments, totaling $13,000:

Because Julie prepaid so little of her ultimate income tax liability, she now realizes that she may be subject to the penalty for underpayment of estimated tax.

a. Based on this information, Julie's required annual payment for estimated taxes should have been $, and each quarterly installment would have been $.

b. The amount by which Julie underpaid her estimated tax is $.

c. If Julie's tax liability for 2016 was $15,960, then the amount by which she underpaid her estimated taxes is $.

April 18, 2017 $4,500 June 15, 2017 2,800 September 15, 2017 4,100 January 16, 2018 1,600 Total paid $13,000

Explanation / Answer

a. As per IRS, if AGI of the person paying the tax is upto $150,000 then he/ she is required to make the quarterly payment of estimated taxes. Estimated taxes is lower of 90% of the current year tax liability or 100% of the tax liability in the last year.

Calculation of estimated taxes to be paid:

1. 90% of the current year tax liability = 90% x 18,000 = 16,200 or

2. 100% of last year taxes = 100% x 25,000 = $25,000

whichever is lower.

Julie's required annual payment for estimated taxes should have been $16,200

Quarterly Tax payment :

b. Underpaid Tax = $16,200 - 13,000 = $3,200

c. If Julie's tax liability for last year would have been $15,960, then her estimated tax liability for current year would have been:

1. 100% of $15,960 = $15,960

2. 90% of $18,000 = $16,200

whichever is lower. i.e $15,960

Underpayment of estimated tax = $15,960 - $13,000 = $2,960

Quarter Amount April 18, 2017 4,050 June 15, 2017 4,050 September 15, 2017 4,050 January 16, 2018 4,050