Accredited Wealth Management Advisor Practice Exam

What action might Joseph take to avoid an underpayment penalty for taxes?

1. Make an estimated tax payment before the end of the year.

2. Distribute funds from his IRA without withholding taxes.

3. Make two separate estimated tax payments in December and January.

4. Accept that no exceptions are possible for underpayment.

The correct answer is: Make an estimated tax payment before the end of the year.

To avoid an underpayment penalty for taxes, making an estimated tax payment before the end of the year is a proactive step that taxpayers can take. The IRS requires taxpayers to pay a certain amount of their expected tax liability throughout the year, either through withholding or estimated tax payments. If Joseph estimates that he will owe taxes and recognizes he hasn't paid enough throughout the year, making an estimated payment before the year ends can help him meet the required threshold and avoid penalties. This proactive measure ensures that Joseph can stay compliant with tax regulations. Taxpayers who don’t pay enough tax during the year may face penalties, and, in certain cases, they can avoid this risk by making sufficient estimated payments based on their income projections. By making this payment, he is taking responsible action to balance his tax account by the end of the year. Distributing funds from an IRA without withholding taxes does not contribute positively to his estimated tax payments, and, in fact, it could generate additional tax liability if not properly managed. Making two separate estimated tax payments in December and January does not help him avoid penalties, as estimated payments must be made within the tax year. Accepting that no exceptions are possible overlooks tax strategies that can mitigate penalties, such as making estimated payments or learning