Earlier this year, Ellin & Tucker’s Dan Thrailkill and Rich Toomey shared with us that an estimated 30 million America taxpayers would be surprised to discover that they may have under-withheld in 2018. This was because this is the first year the new tax law changes brought on by the Tax Cuts and Jobs Act of 2017 would be in effect. This change, coupled with the revised employee withholding tables issued by the IRS last spring, has resulted in many individuals unexpectedly having larger than anticipated tax payments due with the filing of their 2018 individual income tax returns.
Those subject to larger tax payments may have found themselves subject to the penalty for the underpayment of estimated tax. Usually, taxpayers need to pay in throughout the year at least 90-percent of their current year liability to avoid underpayment penalties. But to make up for an error in the new tax code, the IRS issued Notice 2019-11, which basically waived the underpayment of estimated tax penalties for those who paid in at least 85-percent of their 2018 tax liability through withholding and estimated tax payments.
But more relief is coming. Recently, the IRS issued Notice 2019-25, which modifies and supersedes the guidance in Notice 2019-11. The new Notice expands the waiver to individuals whose total withholding and estimated tax payments equal or exceed 80-percent of the tax shown on their return for 2018. Additionally, the notice provides procedures for taxpayers who have previously paid the penalty for underpayment of estimated tax but now qualify for relief under this Notice to request a refund of the penalty paid.
The Bottom line: this further decrease in the percentage of tax that had to be paid throughout the year will provide even more individuals additional relief from unanticipated penalties. However, the penalty waiver still won’t change the fact that a taxpayer is underpaid and therefore should examine their current tax withholding or amount of estimated tax payments that need to be made, but the lower threshold will save some taxpayers from also having to pay a penalty when they pay their liability in April.
While it’s too late to do anything about your 2018 tax withholdings, it’s never too early to look at 2019. Consider reviewing your most recent pay stub and your Form W-4 on file with your employer. Also, the IRS website has a W-4 calculator that provides step by step instructions to determine how many allowances you should be claiming on your 2019 W-4. If you find the calculator to be too complicated, time-consuming, or simply intimidating, there’s always another solution: contact a professional tax accountant and having them review your W-4 filing for you.
SUSAN P. KELLER, CPA, is a Tax Principal at Ellin & Tucker and lead tax advisor in the firm’s Not-for-Profit Services Group. Susan may be reached by email at email@example.com.