The IRS recently announced that they are waiving penalties for many taxpayers who paid too little in taxes throughout 2018. According to the notice they shared on the IRS website, this is to help accommodate the major changes to tax laws implemented by the Tax Cuts and Jobs Act enacted in 2017, which may have caused taxpayers to accidentally withhold too little from their paychecks, or to pay too little in their estimated tax payments throughout the year. Here’s what you need to know about these penalties and how the waiver may affect you.
What Is an Estimated Tax Penalty?
As you likely already know, the United States tax system is a pay-as-you-go system. For wage earners, this means you have taxes withheld from your checks as you receive them. For business owners, it means you make regular estimated payments on your taxes. When you file your tax return each year, you are essentially verifying that you paid the correct amount in taxes during the course of the year. If you overpaid, you get a refund. If you underpaid, you pay the difference.
But the IRS expects every taxpayer to pay at least the majority of the taxes they owe throughout the course of the year. Individuals who vastly underpay are subject to an estimated tax penalty when they file their returns.
Who Is Getting a Waiver?
The IRS is not waiving all estimated tax penalties. Rather, they are reducing the threshold that you need to meet in order to avoid the penalty. Typically, a taxpayer must pay at least 90% of their total tax liability during the tax year in order to avoid a penalty. For 2018, that threshold is reduced to 85% of your total tax liability. This will give many taxpayers confused by the changing tax laws a little leeway.
What Do You Need to Do?
You don’t need to do anything to be eligible for the waiver. The adjustment in the threshold will automatically be integrated into our tax software and will be reflected in a revised Form 2210, along with updated instructions.
However, the IRS strongly recommends that every taxpayer use the agency’s Withholding Calculator to determine the proper amount to withhold from their checks, or the correct amount to pay in your estimated payments throughout the year. Using your most recent paystubs and last year’s tax return, you can get a better idea of how much you should have withheld from your paychecks, so you can avoid unexpected penalties next year.
Once you’ve determined how much you should withhold, you can file a Form W-4 with your employer to adjust your withholdings for 2019; remember, the waiver only applies to your 2018 taxes, so you want to avoid any errors on your withholdings for the current tax year to ensure you’re not subject to the penalty when you file next tax season.
If you’re concerned about whether or not you may still be subject to the estimated tax penalty this year, please contact out tax and accounting firm in Provo right away to speak to a qualified and experienced CPA. We’ll help you calculate your tax liability to determine if the IRS’s waiver applies to you.