Good news during tax season is welcome news, and the IRS just gave good news to taxpayers who underpaid last year.
The IRS announced Friday that it is lowering the amount of tax that an individual must have paid in 2018 to avoid the underpayment of estimated income tax penalty to 80%. The agency appears to recognize that the Tax Cuts and Jobs Act’s (TCJA’s) overhaul of the federal income tax system made it difficult for individuals to determine the proper amount to have withheld from their paychecks or include in their quarterly estimated tax payments for 2018.
You may remember that many individuals started seeing more money in their paychecks back in February 2018, after their employers made adjustments based on the IRS’s updated withholding tables. The revised tables reflected the TCJA’s increase in the standard deduction, suspension of personal exemptions, and changes in tax rates and brackets.
What the tables missed, however, was the reduced availability of itemized deductions and suspension of personal exemptions. People didn’t withhold enough, and many individuals were surprised to find they owed money for 2018. Those particularly at risk for underpayment are those who itemized in the past but are now taking the standard deduction (which is now $12,000 for individuals and $24,000 for married couples filing jointly), two-wage-earner households, employees with nonwage sources of income, and taxpayers with particularly complex tax situations.
So, what does it even mean to “lower the amount of tax that an individual must have paid in 2018 to avoid the underpayment of estimated income tax penalty to 80%”? It’s really just a formal way of saying, “We won’t penalize you so long as you’ve already paid 80% of your tax liability for 2018. If you haven’t, we’ll calculate the fine as usual.”
The tax code imposes a penalty (known as a Section 6654 penalty) if taxpayers don’t pay enough in taxes during the year. The penalty generally doesn’t apply if a person’s tax payments were:
- At least 90% of the tax liability for the year, or
- At least 100% of the prior year’s tax liability. (The 100% threshold rises to 110% if a taxpayer’s adjusted gross income is more than $150,000, or $75,000 if married and filing a separate return.)
This announcement lowers the 90% requirement to 80%.
If you underpaid in 2018, you must file Form 2210, “Underpayment of Estimated Tax by Individuals, Estates, and Trusts,” with your 2018 federal income tax return to get the waiver. It’s not going to be automatically waived for you. In addition, we urge you to work with us to revise your withholding amounts right now. This underpayment penalty waiver is effective only for 2018. If you don’t ensure now that the proper amount is withheld for 2019, you could very well end up owing more than expected next year.
It’s almost April. Don’t delay.