This year Lloyd, a single taxpayer, estimates that his tax liability will be $10,000. Last year, his total tax liability was $15,000. He estimates that his tax withholding from his employer will be $7,800.
A. Is Lloyd required to increase his withholding or make estimated tax payments this year to avoid the underpayment penalty? If so, how much?
B. Assuming Lloyd does not make any additional payments, what is the amount of his underpayment penalty? Assume the federal short-term rate is 5 percent.