With the Tax Cuts and Jobs Act (TCJA) of 2017 overhauling many aspects of personal income tax, this year’s filing is sure to be challenged by plenty of tax payer confusion.
On January 16, the Internal Revenue Service (IRS) announced that it would be waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.
IRS Commissioner Chuck Rettig said, “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. We urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”
But Wait, Taxpayers Still Need to Have Paid 85 Percent of their Estimated Taxes
Usually, a penalty applies at tax filing 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, the January 16 announcement 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. For further details, see Notice 2019-11, posted on IRS.gov.
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