Due to all of the changes brought about last year with the Tax Cuts and Jobs Act (TCJA), many taxpayers have underpaid their estimated taxes or didn’t have enough federal income tax withheld. As such, the IRS recently modified the underpayment penalty calculation for 2018 and waived the fees for any taxpayer who would incur a penalty due to underpayment of their total yearly tax liability.
The penalty waiver is for taxpayers who paid at least 85 percent of their total current year tax liability throughout 2018 through quarterly estimated tax payments, federal income tax withholding or a combination of both. As a rule, the 90 percent of the current year tax is the threshold to avoid a penalty. This waiver computation will be incorporated into commercial tax software and the revised Form 2210, which will be available soon.
This relief is designed to help taxpayers who were not able to correctly adjust their withholding and estimated payments to reflect all of the changes brought about by the TCJA. The waiver is not for people who purposely did not have enough tax withheld or evaded paying taxes.
While the federal tax withholding tables were released in early 2018, they reflected the lower tax rates and the increased standard deduction for the most part. Unfortunately, the tables didn’t completely factor in other changes such as the suspension of dependency exemptions and reduced itemized deductions. As a result, many taxpayers saw more in their paychecks and had less tax withheld in 2018. While most 2018 tax filers are still expected to get refunds, some taxpayers will unexpectedly owe additional tax when they file their returns.
Like last year, the IRS does urge taxpayers to check their withholding this year to ensure they have the right amounts withheld in 2019 by submitting a properly revised W-4 withholding form to their employer or increasing their estimated tax payments. This is essential for anyone who faces an unexpected tax bill. This is also an important step for those who adjusted their withholdings in 2018 or had a major life change. Taxpayers at risk of having too little tax withheld from their pay include those who itemized in the past but now take the increased standard deduction, as well as two-wage households, employees with non-wage sources of income and those with complex tax situations.
Remember, an additional safe harbor to avoid an underpayment penalty is to appropriately match the prior year’s tax. If you have any questions, please contact your Rea advisor.
By: Cindy Kula, CPA/PFS, CFP® (Cleveland)