On January 16, 2019, the IRS announced that it will be waiving the tax underpayment penalty for those who fell short on their 2018 estimated tax payments.
The federal tax underpayment tax penalty is usually waived for taxpayers who paid at least 90% of their tax liability during the year through income tax withholding or estimated payments. The IRS acknowledges that last year many taxpayers had difficulty adjusting their correct withholding or estimated payment amounts, and that as a result they inadvertently underpaid their tax obligations. Therefore, the 2018 threshold has been lowered to 85%. See Notice 2019-11.
When does the underpayment penalty usually not apply?
As a general rule, the penalty for underpayment of estimated tax is not assessed if any of the following conditions are met:
- You paid at least 90% of your tax liability for this year. 26 U.S. Code § 6654(d)(1)(B)(i)
For the 2018 tax year only, this percentage has been reduced to 85%. The IRS has the discretion to enact this change per 26 U.S. Code § 6654(e)(3)(a).
- You paid at least 100% of the amount you owed last year. 26 U.S. Code § 6654(d(1)(B)(ii)
- Your adjusted gross income is more than $150,000 ($75,000 if married filing separately) and you paid at least 110% of the amount you owed last year. 26 U.S. Code § 6654(d(1)(C)
If you paid less than 85% of the amount due, you’re out of luck. The full penalty amount will be assessed against you.
Why did so many taxpayers underpay in 2018?
Following passage of the Tax Cuts and Jobs Act (TCJA), federal tax withholding tables were released that accounted for the new tax law’s lower tax rates and increased standard deduction. However, they failed to account for the elimination of certain itemized deductions and for the suspension of dependency exemptions. As a result, taxpayers who did not revise their W-4s or increase their estimated tax payments over the course of the year ended up paying too little.
Are there any other estimated tax penalty exceptions?
Yes there are. Following are four different exceptions to the tax underpayment penalty as set forth in 26 U.S. Code § 6654(e):
- The amount you owe is less than $1,000.
- You didn’t owe any tax last year, you were a citizen or resident of the U.S. throughout the entire previous year, and you were subject to U.S. tax liability for all 12 months of the previous year.
- The IRS determines that by reason of casualty, disaster, or other unusual circumstances the imposition of the tax penalty would be against equity and good conscience.
- You are newly retired and over the age of 62 or disabled, and your underpayment was due to a reasonable cause and not neglect of your tax obligations.
How can I prevent underpaying my taxes in 2019?
Make sure to check your withholding on the updated IRS Withholding Calculator, and/or review your estimated tax liability now with your accountant.
The IRS notes that the taxpayers most at risk of underpayment are those who used to itemize deductions and now take the standard deduction, are part of a two-wage-earner household, have any nonwage sources of income, and/or have an unusual or complex tax situation. In other words, most of us!
Who can help me with this?
The tax attorneys and accountants at the full service San Francisco tax firm of Moskowitz, LLP have extensive experience with both routine and complex federal and state tax filings. A large part of our practice also involves representing individual and corporate taxpayers with audits, negotiating settlements with the IRS and other tax authorities, and tax litigation. For assistance with your 2018 tax return or any other tax-related matter, contact us today.