Some taxpayers got a break recently; the IRS announced that it is waiving the estimated tax penalty in certain circumstances. The penalty waiver applies to many taxpayers whose 2018 estimated tax payments did not meet the penalty’s usual safe harbor.
Estimated Tax Penalty
Because the U.S. has a pay-as-you-go tax system, taxpayers must pay most of their tax obligation during the year. Taxpayers do this by:
- having tax withheld from paychecks and other income, or
- making estimated tax payments.
Generally, a penalty applies at tax filing when the taxpayer has paid too little during the year. But, the penalty does not apply if the taxpayer meets the safe harbor. The safe harbor is met when:
- The person’s tax payments were at least 90 percent of the tax liability for the year, or
- The person’s tax payments were at least 100 percent of the prior year’s tax liability (110 percent when joint filers’ gross income is over $150,000).
2018 Penalty Waiver
The IRS has changed the safe harbor for 2018 tax payments. Now, the IRS will waive the penalty for any taxpayer who prepaid at least 85 percent of their total tax liability for 2018. Taxpayers who did not prepay less than 85 percent are not eligible for the waiver. The IRS will calculate their penalty using the 90 percent threshold.
The new penalty computation will be integrated into commercially available software. The IRS will also update Form 2210 and its instructions to reflect the penalty relief.
The IRS designed this relief to help taxpayers who were unable to adjust their tax payments for the changes made by the Tax Cuts and Jobs Act. While the IRS expects most tax filers to get refunds, some will owe additional tax when they file their returns.
Like last year, the IRS urges everyone to check their withholding for 2019. This is especially important for anyone now facing an unexpected tax bill when they file.
Those most at risk of having too little tax withheld from their pay include:
- taxpayers who itemized in the past but now take the increased standard deduction,
- two-wage-earner households,
- employees with nonwage sources of income, and
- those with complex tax situations.
To help taxpayers get their withholding right, the IRS has updated its online withholding calculator.