For the 2025 U.S. federal tax year, a taxpayer wants to avoid an estimated tax underpayment penalty. The taxpayer's 2024 adjusted gross income was $180,000. Which of the following correctly describes a safe harbor that would avoid the penalty for 2025?
- Paying, through withholding and timely estimated payments, at least the lesser of 90% of the 2025 tax or 110% of the 2024 tax, because the taxpayer's 2024 AGI exceeded the $150,000 threshold that raises the prior-year percentage from 100% to 110%
- Paying at least 100% of the 2024 tax liability, since the 100% safe harbor applies to every taxpayer regardless of prior-year AGI
- Paying at least 90% of the 2024 tax liability
- No safe harbor is available once prior-year AGI exceeds $150,000
Correct answer: A. Paying, through withholding and timely estimated payments, at least the lesser of 90% of the 2025 tax or 110% of the 2024 tax, because the taxpayer's 2024 AGI exceeded the $150,000 threshold that raises the prior-year percentage from 100% to 110%
IRC Section 6654's safe harbors avoid the underpayment penalty if the taxpayer pays the smaller of 90% of the current year's tax or a percentage of the prior year's tax; that percentage is 100% for taxpayers whose prior-year AGI was $150,000 or less, but rises to 110% once prior-year AGI exceeds $150,000, so a taxpayer with $180,000 of 2024 AGI must use 110% of the 2024 tax (or 90% of the 2025 tax, if lower) rather than 100%. The second option is wrong because the 100% figure only applies below the $150,000 AGI threshold; above it, the higher 110% figure replaces it. The third option describes only the current-year-based prong of the test and ignores that meeting either prong is sufficient, but on its own understates what the prior-year-based prong requires at this income level. The fourth option is wrong because a safe harbor remains available above $150,000 of AGI; the threshold changes the applicable percentage rather than eliminating the safe harbor.
Source: Internal Revenue Code Section 6654; IRS 2025 Instructions for Form 2210; 'Underpayment of estimated tax by individuals penalty'