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The IRS has issued an announcement stating that it will be waiving the penalty for many taxpayers whose tax withholding and estimated tax payments fell short in 2018.

According to the announcement, the IRS is “generally waiving the penalty for any taxpayer who timely paid at least 85 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two.” Usually tax payers who pay estimated tax, must pay at least 90 percent to avoid a penalty.

The IRS has lowered the threshold for tax year 2018 because the Agency recognizes that – many taxpayers may have been unable to properly adjust their withholding and estimated tax payments due to the many complex and often confusing changes that were enacted under the Tax Cuts and Jobs Act (The Act). “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.”

The announcement went on to say that new tax tables released in early 2018, reflected many of those changes, which meant that for the most part, taxpayers had less taxes deducted, and found more in their take home pay. However, the IRS release went on to say that, “the 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, if they did not submit a properly-revised W-4 withholding form to their employer or increase their estimated tax payments.”

As most taxpayers know, the US income tax is a “pay as you go” system. Which means that a good portion of your income tax obligation must be paid throughout the year, and not all at once at the end of the year. Those ongoing tax payments are either made as payroll withholding, or as estimated tax payments. 
Usually, a penalty applies when returns are filed, if too little is paid during the year. Normally, the penalty would not apply for 2018 if tax payments during the year met one of the following tests:

  • The person’s tax payments were at least 90 percent of the tax liability for 2018 or
  • The person’s tax payments were at least 100 percent of the prior year’s tax liability, in this case from 2017. However, the 100 percent threshold is increased to 110 percent if a taxpayer’s adjusted gross income is more than $150,000, or $75,000 if married and filing a separate return.

For waiver purposes only, today’s relief lowers the 90 percent threshold to 85 percent. This means that a taxpayer will not owe a penalty if they timely paid at least 85 percent of their total 2018 tax liability.

How MBAF Can Help

Due to the complex changes to the tax codes created by The Act, we urge all taxpayers to check their withholding for 2019. This is especially important for anyone who may now be facing an unusual and surprising tax bill when they file.

Since the passage of The Act, the experts at MBAF have been working practically non-stop to analyze and evaluate the impacts for businesses and individual taxpayers, of the most significant tax reform in decades.

While The Act resulted in a simplification for some, there are new, added complexities for many. Since tax season is upon us, now is the time to make sure you understand how to maximize the potential benefits to be found in this tax legislation, and not run afoul of any new compliance issues that may cost you.

We can help you answer any questions you may have regarding the Tax Cuts and Jobs Act.

Compliance with and understanding the changes in the tax codes regarding the Tax Cuts and Jobs Act can be complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Tax and Accounting Specialists, or call us at 1-800-239-1474.