What is estimated tax?

Estimated tax refers to the amount a taxpayer anticipates owing in taxes for a given year, considering any deductions and credits they may claim. This is particularly important for individuals who do not have taxes withheld from their income, such as self-employed individuals, freelancers, or those with significant investment income.

By calculating the estimated tax, taxpayers can determine what payments they need to make throughout the year to cover their expected tax liability by the end of the tax year, thereby avoiding underpayment penalties. This concept ensures that taxpayers can meet their tax obligations progressively rather than facing a large bill at tax time.

While the other options discuss various aspects of taxation, they do not accurately define estimated tax. The tax liability for prior years addresses past obligations rather than current expectations. The total tax bill for the previous year does not help in estimating current tax responsibilities. Lastly, the final tax amount due filed on Form 1040 pertains to the tax return process rather than the proactive assessment of tax due for the current year. Therefore, the correct answer encapsulates the proactive financial planning aspect of managing one’s tax obligations.