Intuit Academy Tax Practice Exam

What must Alexa pay to avoid underpayment penalties on her current tax liability?

1. 80% of prior year’s tax

2. 75% of current year’s tax

3. 90% of current year’s tax

4. 100% of current year’s tax

The correct answer is: 90% of current year’s tax

To prevent underpayment penalties, individuals must ensure that they pay a specified percentage of their current year’s tax liability, which is 90% for most taxpayers. This threshold allows taxpayers to manage their tax payments without facing penalties for underpayment, providing a measure of flexibility given potential income fluctuations or changes in tax liability from one year to the next. The rationale behind requiring payment of 90% of the current year’s tax is to encourage taxpayers to accurately estimate their tax liability while avoiding the risks associated with underpayment. It is important to remind taxpayers that if their current year's tax liability is significantly lower than the previous year's, and if they meet other qualifying criteria, they may also organize their payments based on the prior year's tax, but that typically requires covering 100% of the prior year's tax if it is lower than the current year's requirement. Choosing a lower percentage to avoid penalties could lead to underpayment if income rises or if deductions decrease, which is why the requirement focuses on 90% of the current year's liability. This policy helps to ensure that taxpayers remain compliant with tax laws while still being afforded a degree of leniency in their payments through the application of estimates.