Most people lead busy lives and taxes are seldom top of mind. Now, add in sweeping changes from the Tax Cuts and Jobs Act (TCJA) enacted in December 2017 and there are bound to be inadvertent missteps or miscalculations.
The IRS understands.
In light of the far-reaching tax reform law, many taxpayers may have failed to withhold enough money from their paychecks in 2018. Therefore, on January 16, 2019, the Internal Revenue Service announced it is waiving the estimated tax penalty for taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.
It’s a concession that recognizes taxpayers may have been unable to properly adjust their withholding and estimated tax payments in response to the U.S. tax overhaul.
IRS Commissioner Chuck Rettig explained, “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.”
As a reminder, taxpayers are required by law to pay most of their tax obligation during the year (either by withholding or making estimated tax payments), rather than at the end of the year. When they file, a penalty can be applied if too little is paid during the year.
In its announcement, the IRS stated it will generally waive 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. Taxpayers normally avoid penalties if they’ve paid 90% of the taxes owed for the current year.
The new law reduced taxes for many taxpayers, but also introduced major changes to credits and deductions. Although the updated federal tax withholding tables were released in early 2018, those tables largely reflected the lower tax rates and the increased standard deduction brought about by the new law. This generally meant taxpayers had less tax withheld in 2018 and saw more in their paychecks.
However, the IRS stated that those withholding tables couldn’t fully factor in other changes, such as the suspension of dependency exemptions and reduced itemized deductions. As a result, some taxpayers could have paid too little tax during the year, particularly if they did not submit a properly revised W-4 withholding form to their employer or increase their estimated tax payments.
While the announcement of the reduced penalty threshold is certainly a welcome reprieve, the IRS urges taxpayers to check their withholding again this year to ensure they are withholding the right amount for 2019.