Background. Generally, the Internal Revenue Code requires taxpayers to pay federal income tax as they earn income. Payments are made via wage withholding or by quarterly estimated income tax payments. The required estimated payment is generally the lesser of (1) 90% of the tax ultimately determined to be due or (2) 100% of the tax owed by the taxpayer for the prior year (110% if the taxpayer’s adjusted gross income for the prior year was greater than $150,000). If the taxpayer fails to make these estimated payments, a penalty is imposed. There are some exceptions to the imposition of penalties for underpayment, the most common one being that there is no penalty if the remaining tax owed on April 15th is less than $1,000.
The Tax Cuts and Jobs Act (“TCJA”) of December 2017 made substantial changes to the Internal Revenue Code. These changes made it challenging for taxpayers to determine the appropriate amount of their wage withholding or estimated payments for 2018. In February 2018, the IRS issued a revised Withholding Calculator to help taxpayers determined their proper withholding (or estimated tax payment) amounts for 2018. The updated federal tax withholding tables reflected the TCJA’s lower tax rates and doubled standard deduction. It resulted in less tax withheld. However, the new tables did not completely reflect changes such as the suspension of dependence exemptions and significantly decreased itemized deductions. As a result, some taxpayers did not pay enough in federal taxes via wage withholding or estimated payments for 2018.The General Accounting Office (GAO) reports that the Department of the Treasury expects that 21% of filers will be under withheld for 2018. While this number is significant, the GAO reports that 18% of filers were likely to have been under withheld if the tax laws had not changed.
Notice 2019-11. The Notice reports that due to the substantial changes generated by the TCJA (and despite the publication of the revised Withholding Calculator) the IRS is providing relief to individual taxpayers. To qualify for the waiver of penalties due to underpaid tax estimates, the taxpayer must (1) be an individual (2) whose total withholding and estimated tax payments for the year 2018 were made by January 15, 2019, and (3) whose payments equaled at least 85% of the tax ultimately determined to be owed for 2018.
To claim the relief, the taxpayer must file Form 2210, Underpayment of Estimated Tax by Individuals, Estate and Trusts, with his/her 2018 income tax return.
Handling 2018. Given the magnitude of the changes to the Internal Revenue Code, it may be smart to gather your tax information as soon as possible to do a rough draft of your 2018 federal income tax return. You can pull information from your final paystub and from your financial records to estimate your wage and other income. Your tax records will help you determine if you are limited to the new standard deduction or if itemizing is available to you.
Planning for 2019. After you have attended to your 2018 income taxes, make sure your tax estimates for 2019 are on-target using the 2019 Withholding Calculator on the IRS website.