The new tax laws in the US and the subsequent tax code changes have caused much concern, confusion, and have even caused some to experience unwarranted tax penalties. With the massive overhaul of the tax codes and IRS guidance that has taken place over the past 24 months, there appeared to be quite a bit of “trial and error” taking place as the IRS scrambles to apply guidance and tax code to match the new tax laws. Recently in the news, the IRS announced it would waive tax penalties for more than 400,000 eligible taxpayers who underpaid on their 2018 tax returns.
Estimated Tax Penalties
As a “pay-as-you-go” tax system, the US income tax system requires you to pay income tax as you earn it. There are two ways to do this; you can make estimated tax payments (paid once per quarter) or via withholding from each paycheck you receive. However, if you don’t pay enough tax throughout the year in one of these two ways, you might be required to pay an estimated tax penalty. Historically, individuals and business entities avoid estimated tax penalties if they:
- A) Owe less than $1,000 in tax after subtracting withholding and refundable credits, or
- B) Paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.
In the past, if you fell into one of these two categories, then you’d fill out Form 2210 and include it in your tax return filings. If you failed to meet one of these criteria, you underpaid and are subject to a penalty.
Estimated Tax Penalty Waiver
The existing tax law offers some exemptions to the estimated tax penalty. The IRS will waive the tax penalty under three circumstances, including:
- A) If you didn’t make a payment due to a death, disaster, or other unusual situation that would be inequitable to pay the fee, or
- B) If you retired after age 62 or became disabled during the tax year, or
- C) If you underpaid due to an inability to accurately calculate tax liability due to the breadth of changes enacted by the tax reform.
Again, if you fall into one of these categories for the tax year, you’ll need to append Form 2210, entitled “Underpayment of Estimated Tax by Individuals, Estates, and Trusts.”
2018 Tax Penalties Waived
As you might have surmised, the problem which forced the IRS to waive these tax penalties in August of 2019 automatically stems from the Tax Cuts and Jobs Act of 2017. The changes in the tax code set up new tax withholding tables; however, many Americans neglected to update their W4 form (Employee’s Withholding Allowance Certificate) to adjust their withholdings. Because this change in withholding tables caused unknowing individuals to fail the 90% withholding threshold requirement, nearly half a million taxpayers received IRS notices that levied a penalty in addition to their tax bill for 2018.
In response, the IRS lowered the withholding threshold to 80% in the Spring of 2018 and removed the requirement that all estimated tax be paid in four equal installments. The IRS announced this week that they would automatically apply the waiver to all eligible taxpayer accounts without any necessary taxpayer actions.
In a statement from the IRS Commissioner Chuck Retting said, “This waiver is designed to provide relief to any person who filed too early to take advantage of the waiver or was unaware of it when they filed.”
So, as long as you paid at least 80% of your total tax liability for the 2018 tax year and didn’t claim a waiver when filing your 2018 tax return, the tax penalty will be removed.
Tax Strategy and Tax Advice
Taxpayers that haven’t updated their withholdings should review their paychecks to ensure deductions match the updated tax tables.
When it comes to filing your returns, having a trusted tax advisor on your team will help eliminate issues caused by ever-changing tax codes and guidelines.
This story points out the need to have a strong tax strategy in place, along with a trusted tax strategy advisor. Working with an accountant means that you’ll know when external changes could affect your tax strategies.
Tax insight gives you the tools you need to be in firm control of your financial livelihood and destiny.
Contact a Augusta CPA today to access trusted business and tax advice that will help you achieve your goals.
Tax Planning and Strategy from an Augusta CPA
With all the new guidelines and changes within the tax code, it can be difficult to navigate what you may need in the way of tax planning and strategy. Lawhorn CPA Group will work with you to create a tax plan that fits your needs. Contact us today online or via phone at 706-855-9500 to schedule a meeting with one of our valued tax professionals.