You may have noticed some additional cash in your pocket this year, perhaps a little too much. Some taxpayers have potentially paid too little through income tax withholdings from their wages and now face writing a check for the balance of their taxes. For those who routinely received a refund in the past, the under withholding is likely because the updated federal tax withholding tables did not encompass all the wide-sweeping changes brought about by the Tax Cuts and Jobs Act. Due to this confusion, the IRS is waiving estimated tax penalties for some taxpayers.
Typically, an underpayment penalty applies and is added to your tax balance owed if too little was paid in during the year. The penalty usually 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.
However, this year the threshold is being relaxed to 85% versus the 90% rule to compensate for the issue with the withholding tables. If the taxpayer has paid in less than 85%, then they are not eligible for the waiver and the penalty will be calculated as it normally would be, using the 90% threshold.
We urge everyone to check their withholding for 2019. This is especially important for anyone now facing an unexpected tax bill when they file. It is also an important step for those who had a major life change or made withholding adjustments in 2018 to ensure the right tax is still being withheld. Those most at risk of having too little tax withheld from their pay include taxpayers who itemized in the past but will now take the increased standard deduction, as well as two-wage-earner households, employees with non-wage sources of income, and those with complex tax situations.