The Tax Cuts and Jobs Act (TCJA) brought with it many tax changes for 2018. Those changes left many taxpayers unaware of the caps on state and local tax deductions, the elimination of reimbursed job expenses and the suspension of dependency exemptions, just to name a few. To add to the mix, after Congress passed the law, new withholding tables were not available to employers until mid-January and some did not see the switch in withholding until mid-February. Based on all of these changes, taxpayers are finding themselves below the 90% threshold and therefore would have to pay a penalty.
The Internal Revenue Service announced that they will be waiving the estimated tax penalty for those taxpayers who fell short of their total tax liability for the year as long as they paid at least 85% of their 2018 tax bill.
"We realize there were many changes that affected people last year, and this penalty waiver will help taxpayers who inadvertently didn’t have enough tax withheld,” said IRS Commissioner Chuck Rettig. “We urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”
For the 2018 tax year (and only the 2018 tax year) the 90% threshold is reduced to 85%. That means that you will not be hit with the underpayment penalty this tax filing season if your 2018 withholding or estimated taxes equaled at least:
- The individual's tax payments were at least 90 percent of the tax liability for 2018 or
- The individual's tax payments were at least 100 percent of the prior year's tax liability. However, the 100 percent threshold is increased to 110 percent if an individual's adjusted gross income is more than $150,000 or $75,000 if married and filing a separate return.
The 2018 Penalty Waiver
You must complete IRS Form 2210, "Underpayment of Estimated Tax by Individuals, Estates, and Trusts" and file page 1 of the form with your 2018 tax return to claim the 85% waiver. The form can be filed with a return filed electronically or on paper. There is a worksheet included in the form instructions to help determine whether the waiver will apply to you. If it does, check the waiver box (Box A) and file page 1 of Form 2210 with your return. write "85% Waiver" next to Box A.
Paying the Penalty
The United States income tax system is a pay-as-you-go, so taxpayers are required to pay most of their tax obligation during the year, as they earn or receive income. If after completing the Form 2210 worksheet and if you still do not qualify for the waiver, you can either use Form 2210 to figure the penalty amount or have the IRS calculate the penalty and send you a bill. If you want the IRS to figure the penalty for you, complete your 1040 as usual and leave the penalty line (Line 23) on your return blank. Make sure you file your return by April 15, as to not incur an interest bill on top of that penalty.
Avoid the Penalty Next Year
Employees who don't want to get hit with the penalty (again?) next year should do a "paycheck checkup" using the IRS's withholding calculator. The tool will let you know if your current income tax withholding is enough. If it is not you should submit a new Form W-4 to your employer to increase withholding or increase your 2019 estimated tax payments.
To help taxpayers get their withholding right in 2019, an updated version of the IRS online Withholding Calculator is available at IRS.gov.
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