Question

This year Lloyd, a single taxpayer, estimates that his tax liability will be $13,450. Last year, his total tax liability was $17,300. He estimates that his tax withholding from his employer will be $9,985. a. How much does Lloyd need to increase his withholding by (for the year), in order to avoid the underpayment penalty?

Answer 1

Underpayment penalty is not levied if their withholdings and estimated tax payments equal or exceed one of the following two safe harbors:

(1) 90 percent of their current tax liability =$13450*90% = $12,105 or

(2) 100 percent of their previous year tax liability $17,300 [100% of $15,900 for Lloyd assuming his AGI was $150,000 or less].

Since Lloyd’s withholding does not equal or exceed $12,105 or $13,450, he will need to increase his withholding by $2,120 (12105-9985).