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Charles and Joan Thompson file a joint return. In 2015, they had taxable income of $98,620 and paid tax of $16,604. Charles is an advertising executive, and Joan is a college professor. During the fall 2016 semester, Joan is planning to take a leave of absence without pay. The Thompsons expect their taxable income to drop to $79,500 in 2016. They expect their 2016 tax liability will be $11,594, which will be the approximate amount of their withholding. Joan anticipates that she will work on academic research during the fall semester.


During September, Joan decides to perform consulting services for some local businesses. Charles and Joan had not anticipated this development. Joan is paid a total of $31,500 during October, November, and December for her work. Use the appropriate Tax Rate Schedules.


What estimated tax payments are Charles and Joan required to make, if any, for tax year 2016?

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Answer:

Charles & Joan will be required to make estimated payments for 2016

Estimated payments to be made will be lower of the following

  1. Lesser of 90% of the tax shown on the return (see below) $15,694.00
  2. 100% of the prior year tax which is $ 16,604.00

Estimated payments for the year 2016 is shown below

Taxable income for 2016 ($79,500 × $31,500) = $ 111,000

Tax @ 15% upto $75,300 = $8,512.50

Tax @ 25% ($111,000 - $75,300) = $8,925.00

Estimated 2016 tax liability $17,437.50

90% of estimated tax liability $15,694.00

It can be seen from above, that they have to pay $ 15,694 as it is lesser than $16,604

Tax withholding already done in 2016  = $11,594.00

Balance tax to be paid - Difference between the liability and withholding  = $4,100.00

The additional tax to be paid is $ 4,100  

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