When you file your tax returns this season, you may realize you’re one of the many taxpayers whose 2018 withholdings and estimated tax payments fell short of their tax liability. If you are, take heart, as the IRS recently announced it’s waiving tax penalties if you’ve paid at least 85 percent of your 2018 tax liability.
Why is the IRS waiving penalties?
Typically, the IRS requires taxpayers to pay at least 90 percent of their total tax liability to avoid a fee. This year, they lowered the threshold to help taxpayers who were unable to properly adjust their withholding and estimated tax payments after an array of confusing changes introduced by the Tax Cuts and Job Act (TCJA).
If you haven’t paid at least 85 percent of your 2018 tax liability, however, you are not eligible for the waiver, and the penalty will be calculated as it normally would be, using the 90 percent threshold.
How did the TCJA affect withholding?
The TCJA included many changes that affect nearly all taxpayers, including lower tax rates and an increased standard deduction. As a result, the IRS updated federal withholding tables, which were released in early 2018. Unfortunately, the withholding tables didn’t adequately reflect all TCJA changes, such as eliminated dependency exemptions and fewer itemized deductions. If taxpayers didn’t submit an accurately revised W-4 form with updated withholding amounts, they might have paid too little during the tax year.
How can you avoid under-withholding next year?
While this penalty waiver is good news, you don’t want under-withholding surprises come tax time next year. Because of TCJA-related changes, the IRS is urging everyone to do a “paycheck checkup,” which will help you make sure your estimated tax liability is correct for 2019. To accurately estimate this, use the recently updated IRS withholding calculator. Once you’ve completed the withholding calculator form, you’ll have an estimate for your 2019 tax liability. This will give you an indication of whether you need to adjust your current withholding and submit a new W-4.
Share your knowledge
Taxes can be overwhelming, especially with the significant changes included in the TCJA. On top of that, if you under-withheld this year, you may feel anxious about your 2019 withholding. Chances are, you aren’t alone in these feelings. Your employees, colleagues and friends are likely experiencing some of the same uncertainties. So, why not help yourself (and them) out? Check out and share our paycheck checkup article. It’s packed with great TCJA information and steps to ensure more accurate withholdings. And in the meantime, follow us on LinkedIn and Facebook to make sure you don’t miss out on any tax-related news!