Estimated Taxes

REG questions almost always make you compute the required annual payment to dodge the §6654 underpayment penalty, which is the lesser of 90% of the current year’s tax or 100% of the prior year’s tax (the prior-year safe harbor jumps to 110% when prior-year AGI exceeds $150,000, or $75,000 if married filing separately). The “tell” is a high-income taxpayer with a spiking current-year liability: the answer hinges on the prior-year safe harbor because it caps exposure regardless of how large this year’s bill grows. Watch the $1,000 de minimis threshold (no penalty if the balance due after withholding and refundable credits is under $1,000) and remember withholding is treated as paid evenly across all four quarters (unless the taxpayer proves the actual dates), while estimates count when actually paid.

The classic trap is confusing the tax base with the payment mechanism: taxable income (after deductions) drives the amount of tax, while estimates govern the timing of paying it. Another trap—tax credits reduce the liability used in the 90%/100% calculation, so a generous credit can shrink or eliminate the required payment. Hook: “90 now or 100/110 then.”