According to the IRS, they will be waiving underpayment penalties for anyone who had federal income tax withholding and estimated tax payments come in under their actual tax liabilities in 2018. This waiver was constructed with the understanding that the Tax Cuts and Jobs Act (TCJA) would revamp the federal income tax regime and in turn make it more difficult for some taxpayers to accurately determine how much to include in their quarterly estimated tax payment in 2018 or just the correct amount to have withheld from their paychecks.
Tax System Updates
When employers started making adjustments based on the updated IRS withholding tables in February 2018, a number of taxpayers started seeing more money in their paychecks. The latest version of the withholding tables reflects the TCJA’s increased standard deduction, tax rate and bracket changes, and the suspension of personal exemptions.
Roughly, the TCJA doubles the 2017 standard deduction amount to $12,000 for those who file individually and $24,000 to those who file jointly. It also eliminates any personal exemptions in which taxpayers could previously claim for themselves, spouses, or any of their dependents. Additionally, the taxable income thresholds and tax rates for seven different income tax brackets have been adjusted.
The IRS did caution though that these revised withholding tables could mean that taxpayers may find themselves with larger income tax bills in 2018 compared to previous years. This is in part due to some of the changes mentioned above, as well as the reduction and elimination of many previously popular tax deductions. These tables never accounted for the reduced availability of itemized deductions or the suspension of personal exemptions.
For example, taxpayers who traditionally itemize can deduct no more than $10,000 for total taxes (property taxes and sales or income taxes). Taxpayers who choose to itemize can also deduct mortgage interest. However, they can only be on debt of $750,000 for mortgage debt incurred after December 15, 2017, and they will be unable to deduct interest on some of their debt from home equity.
The mix of higher standard deduction, loss of certain itemized deductions, elimination of personal exemptions, and potentially higher tax credits will impact people differently. However, the IRS predicts that the majority of 2018 tax filers will receive some sort of refund.
Generally speaking, most taxpayers can’t be entirely sure how these numerous changes made by the TCJA will affect them—potentially putting them at risk of underpayment penalties for the 2018 tax year. An estimate done last year by The Government Accountability Office determined that around 30 million taxpayers will owe money after filing their 2018 personal income tax returns due to underwithholding. Taxpayers who are likely to be at risk of this are those individuals who have itemized in the past but have chosen to now take a standard deduction, households with two wage earners, taxpayers with complex tax situations, and employees with nonwage sources of income.
Penalties for Taxpayer Underpayment
If taxpayers don’t pay enough in taxes throughout the year, the tax code imposes a penalty. It is important to note that the penalty will generally not apply if an individual’s tax payments were:
- At least 90% of the tax liability for the year, or
- At least 100% of the prior year’s tax liability. (The 100% threshold rises to 110% if a taxpayer’s adjusted gross income is more than $150,000, or $75,000 if married and filing a separate return.)
It is also possible for taxpayers to avoid the underpayment penalty if after subtracting their withholding and refundable credits, they owe less than $1,000 in additional tax.
IRS Waiver for 2018
The waiver from the IRS lowers the 90% threshold to 85% and will not penalize taxpayers who paid at least 85% of their total 2018 tax liability. For individuals who paid less than the 85%, the IRS will still calculate this underpayment penalty as normal.
In order to be considered, taxpayers must request the waiver by filing Form 2210, “Underpayment of Estimated Tax by Individuals, Estates, and Trusts,” with their 2018 federal income tax return.
Concerns During the Shutdown
Although the government shutdown has furloughed about 800,000 federal workers, the IRS has indicated that it will still issue refunds to taxpayers. They have already started recalling a number of its furloughed staff and have planned to have roughly 46,000 employees back on the job in the near future. Delays may still be caused by employees having to use newly updated systems and forms. There is also expected to still be a shortage of IRS employees who will be available to answer the numerous questions from taxpayers regarding the TCJA changes.
Properly Prepare for 2019 Taxes
This underpayment penalty waiver will only be available for the 2018 tax year. Therefore, the IRS wants to ensure that the proper amount is withheld for 2019, so they are urging everyone to review their withholding now, especially any taxpayers who may end up owing more than expected this year. If you have questions regarding the waiver, please reach out to our local CRI professional for more help.