Question

Charles and Joan Thompson file a joint return. In 2017 they had taxable income of $92,370 and paid tax of $14,571. Charles is an advertising executive, and Joan is a college professor. During the fall 2018 semester, Joan is planning to take a leave of absence without pay. The Thompsons expect their taxable income to drop to $70,000 in 2018. They expect their 2018 tax liability will be $8,022, which will be the approximate amount of their withholding. Joan anticipates that she will work on academic research during the fall semester.

During September, Joan decides to perform consulting services for some local businesses. Charles and Joan had not anticipated this development. Joan is paid a total of $35,000 during October, November, and December for her work.

What estimated tax payments are Charles and Joan required to make, if any, for tax year 2018? Do you anticipate that the Thompsons will be required to pay an underpayment penalty when they file their 2018 tax return? Explain your answer.

Answer 1

Charles and Joan will be required to make estimated payments for tax year 2018 of $5459.

Estimated payments = lesser of 90% of the tax shown on the current year return or 100% of the prior year tax

Amount of estimated payments required for tax year 2018:

Estimated year 2018 taxable income	105000 (70000+35000)
Estimated 2018 tax liability (8907+(22%*(105000-77400))	14979
	90%
90% of estimated year 2018 tax liability	13481

Charles and Joan will need to pay estimated taxes based on $13481

Tax withholdings = 8022

Estimated payments to be paid = 13481-8022 = $5459

It is suggested to pay one payment on or before January 15, 2019 as the shortfall in tax liability was due to income earned in the final quarter of the tax year. If all above discussed actions are undertaken on time, Charles and Joan are not likely to face any underpayment penalty on their year 2018 tax return.