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.

Required:

1. How much does Lloyd need to increase his withholding by (for the year), in order to avoid the underpayment penalty?
2. 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.