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Good news: IRS waives penalty for those whose tax withholding payments fell short in 2018

Posted on February 8, 2019

In what is seen as a helpful move for many taxpayers, the IRS is waiving the estimated tax penalty for taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.

“This tax penalty relief is offered with the Tax Cuts and Jobs Act in mind,” says Teipen Selanders Poynter & Ayres CPA Mike Poynter. “The new far-reaching tax reform law, which was enacted in December of 2017, affects the taxes we all will pay in 2018, especially withholding and estimated tax payments. As many taxpayers are just now finding out, they may have needed to adjust their income tax withholding and/or estimated tax payments before the end of the year — or in some cases, both.”

The IRS is waiving the penalty for any taxpayer who paid at least 85 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. The usual percentage threshold is 90 percent to avoid a penalty.

If you haven’t already done an end-of-the-year pre-tax review, you may be in for a few surprises as you begin to prepare your 2018 taxes.

The IRS and CPAs have been urging people to check their 2018 withholding – and are doing so again to make sure taxpayers are having the right amount of tax withheld for 2019.

What changed under the Tax Cuts and Jobs Act:

The updated federal tax withholding tables, released in early 2018, largely reflected lower tax rates and an increased standard deduction. In general, this meant taxpayers had less tax withheld in 2018 and saw more in their paychecks.

However, the withholding tables couldn’t fully factor in other changes, such as the suspension of dependency exemptions and reduced itemized deductions. As a result, some taxpayers could have paid too little tax during the year, especially if they did not submit a properly-revised W-4 withholding form to their employer or increase their estimated tax payments.

Because the U.S. tax system is pay-as-you-go, taxpayers are required by law to pay most of their tax obligation during the year, rather than at the end of the year. This can be done by either having tax withheld from paychecks or pension payments, or by making estimated tax payments.

If you are unsure where you stand with withholding and your 2018 tax preparation, it’s a good idea to begin working with your CPA earlier rather than later. Call your TSPA CPA at 317-598-6700 to set up an appointment this month, if possible.

You can also check out an updated version of the IRS online Withholding Calculator on IRS.gov, and research Publication 5307, Tax Reform: Basics for Individuals and Families.