Question - An individual has increasing levels of income each year and is uncertain regarding the amount of his estimated taxable income for any given year. What tax planning strategy can be used to avoid the penalty for underpayment of estimated tax?
A. To avoid the estimated tax underpayment penalty, the taxpayer should make combined estimated payments and withholdings equal to 90% of the preceding year's tax liability.
B. To avoid the estimated tax underpayment penalty, the taxpayer should make combined estimated payments and withholdings that are equal to or exceed the required percentage of the preceding year's tax liability. The required percentage depends on the taxpayer's filing status for the previous tax year.
C. To avoid the estimated tax underpayment penalty, the taxpayer should make combined estimated payments and withholdings equal to 100% of the current year's tax liability.
D. To avoid the estimated tax underpayment penalty, the taxpayer should make combined estimated payments and withholdings that are equal to or exceed the required percentage of the preceding year's tax liability. A taxpayer must prepay 100% of the preceding year's tax liability if his AGI was $150,000 or less in the previous year. If the taxpayer's previous year AGI exceeded $150,000, to avoid the penalty, for the current year, the taxpayer would need to prepay 110% of his previous year tax liability.