Usually, a big tax bill in April means you didn’t pay enough tax throughout the previous year, and the IRS can penalize filers who owe more than 10% of their total federal tax obligation come Tax Day.
But not this year.
The IRS recently announced it would waive the penalty for any taxpayer who paid at least 80% of their total federal tax obligation during the year. The break would apply whether you paid through payroll withholdings from your wages, estimated tax payments or a combination of the two payment methods.
That means if your withholdings and estimated tax payments for 2018 fell short, you might be able to avoid the penalty this year.
Want to know more?
What’s the background?
Because 2018 was the first year many provisions of the Tax Cuts and Jobs Act of 2017 took effect, many taxpayers might not have had the correct amount of tax withheld from their paychecks or made the right amount of estimated tax payments.
The IRS issued updated federal tax withholding tables (which employers use to calculate how much tax to withhold from employees’ paychecks) in early 2018. But the tables “couldn’t fully factor in other changes, such as the suspension of dependency exemptions and reduced itemized deductions,” the IRS said in a Jan. 16 news release.
As a result, some taxpayers might not have paid enough tax throughout the year. In fact, a report last year by the U.S. Government Accountability Office predicted that about 30 million taxpayers would fail to withhold enough tax from their paychecks for the 2018 tax year.
Why does this matter?
The federal tax system is pay as you go, and usually the IRS expects taxpayers to have paid at least 90% of the total they owe in any tax year by the time they file their federal return — which is due April 15 this year for most filers. Normally, if you end up owing more than 10% of your total bill when you file, the IRS can penalize you for failing to pay your proper estimated tax.
But the IRS has changed that percentage threshold for 2018 taxes in hopes of helping taxpayers whose withholdings or estimated tax payments fell short last year. If you paid at least 80% of your total 2018 federal tax liability during the year, the IRS said it would likely waive the estimated tax penalty.
That penalty is typically based on how late your estimated tax payments are and the interest rate for the period.
How could this impact you?
If you’re among the estimated 30 million wage earners who didn’t have enough withheld from their paychecks or are a business person whose estimated quarterly payments fell short, the IRS says you might not face a penalty this year.
If you paid at least 80% of your total 2018 federal tax obligation, the IRS said it would waive the penalty. However, if you owe more than 20% of your total tax bill when you prepare and file your 2018 federal tax return, the IRS will calculate the penalty as it normally would, using the 90% threshold for its calculations.
What’s next?
If you filed your 2018 federal income tax return before the IRS announced the expanded penalty waiver and you qualify for the expanded relief, you may be able to claim any additional refund you’re owed. You’ll need to complete Form 843, Claim for Refund and Request for Abatement, put “80% waiver of estimated tax penalty” on Line 7 of the form and mail the form. It can’t be submitted electronically.
If still haven’t filed and aren’t sure how much you’ll owe come Tax Day, the surest way to find out is to prepare your tax return. Doing so will help you understand your total tax obligation for 2018, how much of it you’ve already paid and how much you could still owe.
To determine if the amount you owe represents more than 20% of your total federal tax bill, divide the amount you owe by your total tax obligation. Alternatively, a commercial tax preparation software could be able to help you determine if you’ll face a penalty. “The waiver computation … will be integrated into commercially available tax software,” according to the Jan. 16 IRS news release.
If you discover your withholdings fell short in 2018, you can get a head start on adjusting your 2019 withholdings by using the IRS’ online withholding calculator.