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SEE-1 - Advising the Individual Taxpayer - Section 5.1

Apply year-end tax planning strategies including income timing, deduction acceleration, withholding adjustments, and retirement contribution optimisation.

Apply year-end tax planning strategies including deferring income into the next year, accelerating deductible expenses, adjusting withholding on Form W-4 to avoid penalties, and maximising pre-tax retirement contributions. Weigh the trade-offs between contributing to a traditional versus Roth account given a client's current and expected future marginal tax rates.

Tax planningYear-end planningWithholding adjustmentsRetirement planning

Practice question for this objective

Free sampleAdvising the Individual Taxpayermedium

Desmond Achebe, a single filer, will have wage withholding of 14,000 dollars for 2024 and expects his 2024 total tax to be 40,000 dollars. His 2023 return showed total tax of 22,000 dollars on adjusted gross income of 120,000 dollars. The required annual payment to avoid an estimated-tax underpayment penalty is the lesser of 90 per cent of the current-year tax or 100 per cent of the prior-year tax, because his prior-year AGI did not exceed 150,000 dollars. What is the smallest additional payment, on top of his withholding, that lets him meet a safe harbour?

  • A22,000 dollars
  • B8,000 dollars Correct
  • C10,200 dollars
  • D26,000 dollars
Determine the additional estimated payment as the lesser safe-harbour amount minus tax already withheld, using 100 per cent of prior-year tax when prior AGI is at or below 150,000 dollars. Under Section 6654 the required annual payment is the lesser of 90 per cent of the current year's tax or 100 per cent of the prior year's tax when prior-year AGI does not exceed 150,000 dollars. The lesser figure is the 22,000 dollar prior-year tax, and withholding counts toward it, so only the 8,000 dollar shortfall must be paid as estimated tax.

Why A is wrong: This uses 90 per cent of the 40,000 dollar current-year tax, or 36,000 dollars, less the 14,000 dollars withheld. That is the larger safe harbour, but the required payment is the lesser of the two harbours, so the prior-year figure governs.

Why B is correct: The two safe harbours are 90 per cent of 40,000 (36,000 dollars) and 100 per cent of the 22,000 dollar prior-year tax. The lesser is 22,000 dollars, and withholding already covers 14,000, so only 8,000 dollars more is needed.

Why C is wrong: This applies the 110 per cent high-income multiplier to the 22,000 dollar prior-year tax (24,200 dollars) and subtracts withholding. The 110 per cent factor applies only when prior-year AGI exceeds 150,000 dollars, which is not the case here.

Why D is wrong: This treats the full 40,000 dollar current-year tax as the target and subtracts withholding. The safe harbour never requires 100 per cent of the current year; the lower of 90 per cent of current tax or the prior-year amount applies.

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