Question

A single self-employed taxpayer estimates that his 2009 tax will be 7,500. His 2008 tax was 7,000. How much must he prepay for 2009 in order to avoid an underpayment penalty?

Answer 1

To avoid an underpayment penalty, the self-employed taxpayer needs to prepay at least 90% of their current year's tax liability or 100% of their previous year's tax liability, whichever is lower.

Step-by-step explanation:

To avoid an underpayment penalty, the self-employed taxpayer needs to prepay at least 90% of their current year's tax liability or 100% of their previous year's tax liability, whichever is lower. In this case, the taxpayer's estimated tax for 2009 is $7,500, which is higher than the previous year's tax of $7,000. Therefore, they will need to prepay at least $7,000 to avoid an underpayment penalty.