IRS Waives Penalty for Many with Short Witholding or Estimated Tax Payments

The Internal Revenue Service (IRS) announced on January 16, 2019 that it is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.

The IRS is generally waiving the penalty for any taxpayer who paid on or before January 15, 2019 at least 85 percent of their total tax liability 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.

The waiver computation announced will be reflected in the forthcoming revision of Form 2210 and instructions.

This relief is designed to help taxpayers who were unable to properly adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act (TCJA), the far-reaching tax reform law enacted in December 2017.

“We realize there were many changes that affected people last year, and this penalty waiver will help taxpayers who inadvertently didn’t have enough tax withheld,” said IRS Commissioner Chuck Rettig. “We urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”

The updated federal tax withholding tables, released in early 2018, largely reflected the lower tax rates and the increased standard deduction brought about by the new law. This generally 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, if they did not submit a properly-revised W-4 withholding form to their employer or increase their estimated tax payments.

Although most 2018 tax filers are still expected to get refunds, some taxpayers will unexpectedly owe additional tax when they file their returns.

Additional Information

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.

In general, a penalty applies at tax filing if too little is paid during the year. Normally, the penalty would not apply if tax payments during the year meet one of the following tests:

• Tax owed on the current year return is less than $1,000; or
• Lessor of the following two amounts has been paid –
  • At least 90 percent of the current year’s tax liability; or
  • 100 percent of tax shown on the prior year’s return (or 110% with adjusted gross income in excess of $150,000/$75,000 for a married individual filing separately), unless the prior year was not a 12-month period.

For waiver purposes only, the newly announced relief lowers the 90 percent threshold to 85 percent. This means that a taxpayer will not owe a penalty if they paid at least 85 percent of their total 2018 tax liability. If the taxpayer paid less than 85 percent, then they are not eligible for the waiver and the penalty will be calculated as it normally would be, using the 90 percent threshold. For further details, see Notice 2019-11, posted yesterday on IRS.gov or contact us at American Expatriate Tax.

Similar to last year, the IRS urges everyone to check their withholding and estimated tax payment for 2019. This is especially important for anyone now facing an unexpected tax bill when they file. This is also an important step for those who made adjustments in 2018 or had a major life change to ensure the right tax is still being withheld.

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, as well as two-wage-earner households, employees with income not subject to withholdings, head-of-household filers in the higher tax brackets, and those with complex tax situations.

For expatriates whose tax situation is more complex and those who anticipate life event changes or a material change in their income, American Expatriate Tax could help  project your tax liabilities, assess planning opportunities, and review your Form 673, W-4, and/or estimated tax payments.

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American Expatriate Tax is a part of Contexo Global Mobility Solutions & Tax Consulting Ltd. registered in Hong Kong. Together, we help companies and individuals navigate through the complexities of global mobility and related tax issues. Here is where you will find a blend of expertise from Big 4 accounting firms and Fortune Global 500 companies but the attention of a boutique consulting practice. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.