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TCP CPA Practice Questions: Calculating Estimated Tax Payments
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May 22, 2024
In this video, we walk through 5 TCP CPA exam practice questions teaching how to calculate estimated tax payments for individuals to avoid underpayment penalties. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/tcp-cpa-practice-questions-explained-estimated-tax-payments/ See the other TCP walkthrough videos here: https://www.superfastcpa.com/free-tcp-cpa-practice-question-walkthroughs/ 00:00 Intro 00:53 Question 1: Learning the Basics of Estimated Tax Payments 03:16 Question 2: Learning the Basics of Estimated Tax Payments Continued 06:00 Question 3: AGI Over $150,000 in Previous Year 07:14 Question 4: Calculating the Underpayment Penalty 08:50 Question 5: Calculating How Much the Employer Withheld 10:41 Pillar Topics
View Video Transcript
0:00
Welcome to another TCP walkthrough video. I'm Logan and in today's video
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We're going to be going over calculating estimated tax payments And we're going to be doing that the super fast CPA way
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Which is diving straight into questions to learn the material now If you don't know much about our strategies
0:16
Make sure you go to super fast CPA comm and check out our free one-hour webinar training
0:21
We teach the key ingredients to passing the CPA exam. And again, it's only one hour
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It is free and it will save you so much time struggling with your CPA process
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Make sure you go check it out. The link will be in the description Also, just letting you know we will only be going over five questions in this video
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Whereas super fast CPA members will have access to the full 10 question video when we post it on the members forum
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So if you like this, you can get more of it by becoming a super fast CPA member with that said let's dive straight into
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Okay, here is question one John a self-employed graphic designer expects to earn
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$120,000 in net income this year He does not have any withholding taxes and pays all his taxes through quarterly estimated tax payments
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John's total tax liability last year was $22,000 and his AGI was below
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$150,000. Okay, we don't know why that matters, but it's there assuming John's applicable tax rates and deductions remain consistent with the previous
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Year, and he wants to avoid any underpayment penalties. How much should John pay in estimated tax payments each quarter for the current year
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Okay, this is the first question of the video and we might not know very much about how estimated tax payments work
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So let's just dive straight into the answer to start learning how it works. Okay, and the answer was
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$5,500 now that does make sense, you know 22,000 divided by four that's
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$5,500 but it looks like it's gonna explain a little bit more to us. So let's read through this determine last year's tax
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So since John's AGI was less than $150,000, he can avoid penalties by paying 100% of last year's tax liability
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Okay, $22,000 divided by four that's $5,500. So he makes those as quarterly payments
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But let's learn about the underpayment penalty here to avoid an underpayment penalty for estimated taxes
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individuals must pay at least 90% of the tax due for the current year or
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100% of the tax reported on the previous year's tax return, whichever is smaller
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For individuals whose adjusted gross income or AGI exceeded $150,000 it's either the 90% of the current year or
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110% of the previous year's tax These payments are typically made in for equal installments throughout the year if these thresholds are met through timely estimated tax payments or withholding
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The individuals will not face an underpayment penalty Okay So basically from what we understand here to avoid getting a penalty for not paying enough taxes
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You can make estimated tax payments and to know how much your estimated tax payments need to be and need to total
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you either need to take 100% of the past year's tax liability or
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90% of the current year's tax liability and then I guess if you make over $150,000
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It's 90% of the current year's tax liability or 110% of the previous year's tax liability. Alright, we learned the basics of this. So let's go ahead and go to the next question
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Okay, here is question two Samantha a marketing consultant has an expected annual income of $100,000 from her consulting business this year
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She also works part-time at a local firm where she earns $30,000 and her employer withholds taxes from her salary at the end of the year Samantha calculates that her total tax liability is
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$35,000 the withholding from her part-time job amounts to $6,000 for the entire year last year
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Her total tax liability was $30,000 So we need to calculate how much she needs to pay
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By the end of the year through estimated tax payments to avoid the penalty So if you think through this you'll probably be able to figure it out with what we just went over in the previous question
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So if you want you can go ahead and try but if not if you're kind of confused how the withholding from her job might
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Affect it that's okay. We'll go ahead and look at the answer together. Okay, and the answer was
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$24,000 so let's go through this. So to determine the total payment to avoid penalty first
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We need to decide whether she's going to take 100% of last year's tax liability or 90% of the current years
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so last year's tax liability was 30,000 and 90% of 35,000 which is the current year would be 31,500
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So she's going to take 100% of the previous year's tax liability because that's smaller
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so then you take the withholding from her part-time job and you subtract it from
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The total amount that she needs to pay and that leaves $24,000
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So she needs to make $24,000 in estimated tax payments throughout the rest of the year to be able to reach that
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$30,000. So let's learn a little bit about this what counts as a prepayment of tax
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So obviously there's those, you know, the quarterly estimated payments, but it seems like
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Withholding from a job can also count So let's read through this any over payment from previous years that has not been refunded and is applied to the current year's tax liability
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So an overpayment or a refund that you didn't get yet that can count taxes that are withheld from your wages by an employer
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Yep, we learned that any payments you make directly to the IRS including electronic payments mail checks or online payments again
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That's the quarterly payments If you have multiple employers and pay more in FICA taxes than the annual limit the excess is credited towards your tax liability
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So only if you have multiple employers and you're paying too much FICA because you have multiple employers
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Then that can count towards your tax liability and then credits such as the earned income tax credit or additional child tax credit can be
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Applied to your tax bill and may result in a refund So those can also affect your tax liability and how much you need to actually pay
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So those are some of the things that can count as prepayment of tax but the most simple of those is your employer withholding from your wages and
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You making estimated tax payments throughout the year. Those are the most simple ones
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All right, let's go ahead and go to the next question. Okay, here is question 3 Michael had an adjusted gross income of
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$160,000 last year with a total tax liability of $40,000 for the current year Michael expects his income to increase
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projecting an AGI of $200,000 with an estimated tax liability of $52,000 what is the minimum amount of estimated tax payments that Michael should make to avoid any underpayment penalties this year
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Okay, so this seems pretty straightforward, but there is one part of the rule that you're gonna need to remember
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So go ahead pause the video do the calculation yourself if you can remember how to do it and when you're ready come back
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We'll look at the answer together. Okay, and the answer was $44,000 so you calculate 110% of last year's tax and you might be like wait 110
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That's because his AGI last year was over $150,000. So again 110% of last year's tax liability is
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44,000 90% of the current year's tax liability is 46,800 so even though it's 110% of the last year's tax liability
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That's still less than 90% of the current year's tax liability So he's gonna take that and so he needs to pay at least
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$44,000 in Taxes to avoid underpayment penalty. Alright, let's go ahead and go to the next question. Okay, here is question 4
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Sarah had a tax liability of $28,000 last year Her adjusted gross income did not exceed $150,000 for the current tax year Sarah estimates
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Her tax liability will be $30,000 due to an oversight She only paid $6,000 each quarter if the IRS applies a 6% annual penalty rate for any underpayment
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Calculate the penalty Sarah must pay on the underpaid amount. Okay, so this is the first time that we're dealing with somebody who underpaid
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So now we need to figure out what the penalty is if you do underpay So if you would like go ahead pause the video see if you can figure this out and when you're ready, we'll come back
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We'll look at the answer together. Okay, and the answer is $180 that's the tax penalty. So you always need to figure out what is the minimum amount that they should have paid
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So 100% of last year's tax was 28,000 90% of the current year's tax is 27,000. So they're actually gonna take
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27,000 as the lower of the two and then you take the actual payment, which was the $6,000 per quarter times by four
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So that's $24,000 and that means that she only paid 24 of
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27,000 so that's $3,000 left of taxes that she didn't pay. So 6% of that is
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$180 penalty now that 6% is the current number in 2024 but don't focus on that too much because that is something that can change with time
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So just know that there is a percentage given by the IRS that is used to calculate the penalty for underpaid tax
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All right. Let's go ahead and go to the next question All right. Here is question 5 Evelyn had a tax liability of $36,000 last year
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She expects her income to remain relatively stable and plans to use the safe harbor rule for estimated tax payments to avoid underpayment penalties
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Just letting you know the safe harbor rule it has a whole bunch of things about it
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But in this case, it's talking about, you know, making that minimum of 100% of last year or 90% of the current year
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That's the idea that it's getting out with the safe harbor rule Evelyn decided to make quarterly estimated tax payments of $3,500 avoiding underpayment penalty
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So she did avoid it at the end of the tax year Evelyn's total tax liability turned out to be $36,000 as well
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So it was $36,000 last year and this year What was the amount withheld by Evelyn's employer? Okay, this question might be a bit of a curveball
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It might be like wait what I have to figure out what the employer withheld from this but you can figure it out
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Just think through this pause the video if you need to to figure out the answer and when you're ready come back
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We'll look at it together. Okay, and the answer was $18,400 so you take the total quarterly estimated payments that were made and that was
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$14,000 that's the 3,000 times 4 and then you take what was the minimum amount that they were gonna have to have paid and that
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Was the 90% of the total tax liability this year because they're the same amount
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So 90% is obviously less than 100% So that gives you thirty two thousand four hundred dollars
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Then you subtract the estimated tax payments that were made and that leaves how much the employer must have paid
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Because Evelyn did avoid underpayment penalty, so she made the right payments
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So that means that her employer must have covered the rest of the estimated payments
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So that's why eighteen thousand four hundred dollars is how much her employer withheld
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All right, we've gone through five questions in this video. We've learned a lot before we go any further
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Let's go ahead and do one more part of the process called pillar topics Now the idea behind pillar topics is that as you're going through the questions to learn the material
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You will notice the topics and the concepts and the calculations that are obviously important because they come up in
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Multiple questions as you're going through them you see this in like three or five questions as you're doing your study session that morning
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So, you know that they're important so you make pillar topics on them so that you can remember them for later
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So let's go ahead and look at the pillar topics for this video. Okay, here are the pillar topics
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Taxpayers, especially those with income not subject to withholding like freelancers or self-employed individuals need to make quarterly estimated payments
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So again, most people when they have a normal employer their employer withholds taxes from their income
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So a lot of times you don't really have to worry too much about having to make estimated payments
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So usually this applies to people who don't have somebody already doing that for them and they have to make those estimated tax payments themselves
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the safe harbor rule which is what we went over allows taxpayers to avoid underpayment penalties if they pay at least a hundred percent or
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110 percent if their AGI was over a hundred and fifty thousand dollars the previous year
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Of their previous year's tax liability or 90% of the current year's estimated tax
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Withholding from wages can count towards meeting the estimated tax requirement the difference between the total tax liability and the amount withheld must be covered by estimated tax payments if
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Taxpayers underpay their estimated taxes. They may face a penalty. The penalty is based on the IRS rate
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For example 6% annual right now applied to the underpayment amount and again that percentage can change with time
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So just know that there is an IRS annual rate that they use and finally prepayments can include previous year overpayments
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Applied to the current year withholding from wages Direct payments made to the IRS and any excess FICA taxes paid due to multiple employers
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All right Those are the pillar topics for this video and with that we've gone through the five questions in this video
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Just one more reminder to go check out our free one-hour webinar training on superfast CPA comm again
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We teach the key ingredients to passing the CPA exam and it's something you don't want to miss
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Also, we only went over five questions in this video But if you liked it superfast CPA members will have access to the full 10 question video when we post it in the members forum
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So you can get more of this if you become a superfast CPA member if you liked this video
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Make sure to like it and leave a comment. I hope this was helpful and I will see you in the next video
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