2 Explain the two safe harbors available to an Individual ta

2. Explain the two \"safe harbors\" available to an Individual taxpayer to avoid a penalty for underpayment of estimated tax.

Solution

The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what isowed in the current year, you can escape a penalty.

The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor isgenerally 100% of the prior year’s tax liability. However, for a higher income taxpayer whose AGI exceeds $150,000($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

Or

Prior Year Safe Harbor – The total of your withholding and timely quarterly estimated tax payments is at least 100% of your prior year tax (or 110% of the prior year tax for higher income taxpayers). The American Recovery and Reinvestment Act, signed into law on February 17, 2009, provides for a lower prior year safe harbor percentage – 90% – for taxpayers whose 2008 adjusted gross income was less than $500,000 ($250,000 if married filing separately) who earn at least half of their income from a small business. For this purpose, a “small business” is one with less than 500 employees.
Current Year Safe Harbor – The total of your withholding and timely quarterly estimated tax payments is at least 90% of your current year tax.