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If you’re putting off doing your taxes until we’re closer to April 15, you might want to reconsider. We have a fresh new Form 1040 to deal with. Tax changes adopted by the 2017 Tax Cuts and Jobs Act (TCJA) are now in effect (2018 through 2025). Some changes will likely affect you.
For one, if you’re working, your W-2 withholding may not have been sufficient to cover your 2018 taxes. Because of changes in withholding tables, fewer dollars were withheld from paychecks last year. As a result, taxpayers who are used to tax refunds may be surprised to get lower refunds or even owing taxes – and if you owe taxes, you may also owe an underpayment penalty. If so, you might qualify for a Form 2210 waiver that you have to file along with your 2018 tax return.
Who is most likely affected? “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,” according to IR-2019-03 released on January 16, 2019.
The good news is that in January, the IRS anticipated taxpayer under-withholding and issued relief that you may benefit you. IRS Notice 2019-11.
This is what you need to know.
“The IRS is generally waiving the penalty for any taxpayer who 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. The usual percentage threshold is 90 percent to avoid a penalty,” according to an IR-2019-03 released on January 16, 2019.
IRS Commissioner Chuck Rettig commented: “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.”
Remember that taxpayers are required to pay income tax liability under a “pay-as-you-go” system. Payment is usually done through tax withholding from paychecks, supplemented when necessary with a taxpayer making estimated quarterly payments.
A penalty is due when insufficient amounts are paid to the U.S. Treasury, but there is some wiggle room.
Quoting from IR-2019-03:
“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 paid at least 85 percent of their total 2018 tax liability. If the taxpayer paid less than 85 percent, then they are not eligible for the waiver and the penalty will be calculated as it normally would be, using the 90 percent threshold.”
When you do your taxes, if it looks like you’ll be subject to the penalty, see if you qualify for the waiver. You’ll need IRS Form 2210 called “Underpayment of Estimated Tax by Individuals, Estates, and Trusts.” Most importantly, read the instructions first, since the form itself does NOT use the 85 percent figure. In the instructions, you’ll find a reference to the special underpayment penalty waiver, as well as an “85 Percent Exception Worksheet” on Page 3.
Commissioner Rettig also urged taxpayers to check their withholding now for 2019. Good advice. Here’s how.
Use the IRS Withholding Calculator.
By the way, even though the calculator is meant to be used for 2019 withholding, you can enter your 2018 information, and you’ll get a sense of how much tax should have been withheld. Then you can compare your actual withholding.
For additional reading on how the new tax laws affect taxpayers, go to IRS.gov/taxreform. Look for Publication 5307, Tax Reform: Basics for Individuals and Families, and Publication 5318, Tax Reform What’s New for Your Business.