The IRS issued welcoming news for taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year. The penalty waiver applies to most taxpayers who paid at least 85% of their total tax liability during the year through tax withholdings, and quarterly estimated tax payments.

This waiver is intended to help taxpayers who were not able to adjust their withholding and estimated tax payments to reflect changes under the Tax Cuts and Jobs Act (TCJA).

The IRS released updated federal tax withholding tables at the beginning of 2018, which reflect the lower tax rates and increased standard deduction. The table did not take into consideration other changes including suspension of dependency exemptions and reduced itemized deductions. Because of this, taxpayers may have paid too little tax during the year if they did not provide a revised W-4 withholding form to their employer or increase their estimated tax payments.

Since the U.S tax system is pay-as-you-go, taxpayers are required to pay most of their tax responsibility throughout the year. Taxpayers can have tax withheld from paychecks or pensions, or they can make estimated tax payments.

A penalty is applied if too little tax is paid during the year. There will most likely not be a tax penalty for 2018 if tax payments during the year met one of these conditions:

  • The individuals tax payments were at least 90% of the tax liability for 2018 or
  • The individual’s tax payments were at least 100% of the prior year’s tax liability from 2017. The 100% threshold increases to 110% if a taxpayer has adjusted gross income of more than $150,000, or $75,000 if married and filing a separate return.

The waiver relief lowers the 90% threshold to 85% meaning that taxpayers will not owe a penalty if they paid at least 85% of their total 2018 tax liability. Taxpayers that paid less than 85% are not eligible for the waiver and their penalty will be calculated as it normally would be, using the 90% threshold.

Tax Withholding for 2019

All taxpayers should check their 2019 withholdings to ensure the right tax is being withheld. The IRS says this is most important for anyone facing an unexpected tax bill, taxpayers who made withholding adjustments in 2018 or had a major life change. 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, as well as two-wage-earner households, employees with nonwage sources of income and those with complex tax situations.

To help taxpayers get their withholding right in 2019, an updated version of the agency’s online Withholding Calculator is now available.

If you have questions or need assistance with your taxes, contact an MCB Tax Advisor at 703-218-3600 or click here To review our tax news articles, click here. To learn more about MCB’s tax practice and our tax experts, click here.

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