Ophelia Brackenridge is filing her first-ever federal income tax return for 2024 because she had no filing requirement in any prior year, so she has no prior-year tax figure to rely on. She expects her 2024 total tax to be 60,000 dollars and wants to make the smallest total of withholding and timely estimated payments that still avoids an underpayment penalty. Because no prior-year safe harbour is available to her, she must rely on the current-year test, which requires payment of 90 per cent of the current-year tax. What is the smallest amount she can pay in for 2024 and still meet the safe harbour?
- A66,000 dollars
- B60,000 dollars
- C6,000 dollars
- D54,000 dollars Correct
Why A is wrong: This applies a 110 per cent figure to the current-year tax, but 110 per cent is the high-income prior-year percentage and does not apply to the current-year test, which is 90 per cent.
Why B is wrong: This pays 100 per cent of the current-year tax, which certainly avoids a penalty but is more than required, since the current-year safe harbour is satisfied at 90 per cent.
Why C is wrong: This is the 10 per cent shortfall that the 90 per cent test permits, not the required payment itself, which is the 90 per cent that must actually be paid in.
Why D is correct: The current-year safe harbour requires paying 90 per cent of the current-year tax, and 90 per cent of 60,000 dollars is 54,000 dollars, which is the smallest amount that avoids the penalty when no prior-year figure is available.