Question

An unmarried taxpayer with AGI of $120,000 in 2017 has a tax liability of $21,000. The taxpayer's 2018 AGI and tax liability are $175,000 and $31,000, respectively. To avoid any penalty for underpayment of estimated tax in 2018, the minimum amount the taxpayer must prepay during 2018 is:

A. $21,000

B. $23,100 (marked incorrect on test results already)

C. $27,900

D. $31,000

E. $34,100

Answer 1

For 2017, AGI = 120,000. His/ Her tax calculation for 2017 is as under:

Tax rate	Min	Max	Taxable Portion	Tax
10%	0	9325	9325	932.5
15%	9326	37900	28575	4286.25
25%	37901	91900	54000	13500
28%	91901	191650	28100	7868
33%	191651	416700		0
35%	416701	418400
40%	418401

Hence his total Tax in 2017 = 26581.75

Generally, an underpayment penalty is not applicable if either:

1. Total tax is less than $1,000,
2. No tax liability last year.

If adjusted gross income (AGI) in prior year was more than $150,000, to avoid an estimated tax penalty you must pay the minimum of

1. 90% of your expected tax for 2018
2. 110% of the tax shown on your 2017 return or 100% If your AGI is under these high-income thresholds

In this case,

1. 90% of your expected tax for 2018 = 90% * 31000 = 27,900
2. 110% of the tax shown on your 2017 return = 110% * 26581.75 = 29,239

Thus to avoid any penalty for underpayment of estimated tax in 2018, the minimum amount the taxpayer must prepay during 2018 is 27,900.