2018 Tax Payments Fall Short? You May Be Eligible for Penalty Relief
The IRS announced that it is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.
The IRS is generally waiving the penalty for any taxpayer who paid at least 85% of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. The usual percentage threshold is 90% to avoid a penalty.
The move addresses concerns expressed by various parties. A July 2018 Government Accountability Office (GAO) report projected that nearly 30 million taxpayers will owe money when they file their 2018 personal income tax returns due to underwithholding. A wide range of changes from the Tax Cuts and Jobs Act (TCJA) caused many taxpayers to be underwithheld.
A recent letter to the IRS from U.S. Senator Ron Wyden (D-OR) noted that millions of taxpayers would face unexpected tax bills and penalties. He wrote: “It seems unavoidable that millions of taxpayers who are expecting critical tax refunds will instead owe taxes” when they file.
The American Institute of CPAs and the National Conference of CPA Practitioners, in separate letters to the IRS, also asked the tax agency to forgo imposing penalties related to certain underpayments and under-withholding due to the TCJA, which was enacted in December 2017.
Because the U.S. tax system is pay-as-you-go, taxpayers are required, by law, to pay most of their tax liability during the year — rather than at the end of the year. This can be done by either having tax withheld from paychecks or pension payments, or by making estimated tax payments.
Usually, a penalty applies at tax filing if too little is paid during the year. Normally, the penalty wouldn’t apply for 2018 if tax payments during the year met one of the following tests:
The person’s tax payments were at least 90% of the tax liability for 2018, or
The person’s tax payments were at least 100% of the prior year’s tax liability, in this case from 2017. However, the 100% threshold is increased to 110% if a taxpayer’s adjusted gross income is more than $150,000 ($75,000 if married and filing separately).
For waiver purposes only, the IRS relief lowers the 90% threshold to 85%. This means that a taxpayer won’t owe a penalty if he or she paid at least 85% of his or her total 2018 tax liability. If the taxpayer paid less than 85%, then he or she isn’t eligible for the waiver and the penalty will be calculated as it normally would be, using the 90% threshold.
When it comes to withholding, the IRS wants taxpayers to check their situation again for 2019. This is especially important for anyone who faces an unexpected tax bill when they file a 2018 return this filing season. It’s also an important step for those who made withholding adjustments last year or had a major life change. You want to make sure the correct tax is still being withheld.
Who Could Have a Tax Season Surprise?
Those most at risk of having too little tax withheld from their pay include:
- Taxpayers who itemized in the past but now take the increased standard deduction,
- Two-wage-earner households,
- Employees with non-wage sources of income, and
- Taxpayers with complex tax situations.
To help get withholding right in 2019, an updated version of the agency’s online withholding calculator is now available on the IRS website. To access it, go to: https://www.irs.gov/individuals/irs-withholding-calculator.