Tax Update: IRS Waives 2018 Estimated Tax Penalty for Certain Taxpayers
The IRS announced January 16 that it will waive the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments did not meet their total tax liability for the year due to changes in the withholding guidelines under the Tax Cuts and Jobs Act (TCJA).
According to the recent IRS announcement, this penalty waiver applies to those taxpayers who have paid at least 85 percent of their total tax liability for 2018.—whether through federal income tax withholding elections, quarterly estimated tax payments or a combination of both. Taxpayers who did not pay at least 85 percent of their tax liability for 2018 are not eligible for this waiver.
ESTIMATED TAX PENALTY & SAFE HARBOR RULES
Under the rules of the U.S. tax system, taxpayers are required to pay the majority of their tax obligation during the year. This can be done through federal income tax withholding, quarterly estimated tax payments or a combination of both.
The IRS typically applies a penalty for taxpayers at the time of tax filing if and when their payments during the year did not meet the majority amount of their tax liability. However, a safe harbor rule exists and is considered to have been met by taxpayers in two scenarios: when the taxpayer’s payments fulfilled at least 90 percent of the tax liability for the year, or the taxpayer’s payments equaled at least 100 percent of the prior year’s tax liability (110 percent for taxpayers with income over a certain threshold).
THE 2018 PENALTY WAIVER
Because some taxpayers were unable to adjust their applicable tax payments for 2018 to account for the new changes imposed by the Tax Cuts and Jobs Act, the IRS has provided this penalty waiver as a means of relief for those taxpayers whose scenarios apply.
For those taxpayers who did not meet the 85 percent minimum payment requirement to be eligible for the penalty waiver, the IRS will calculate penalties using the standard 90 percent threshold.
As mentioned in our previous blog, “Wage Withholding Considerations,” it is of utmost importance, perhaps now more than ever, for taxpayers to review their withholding elections for 2019 and consider making any necessary adjustments to accommodate the TCJA changes. We recommend that you consult your trusted tax advisor for guidance related to your withholding elections and preparation for your estimated tax obligations.
We will continue to monitor updates regarding all relevant changes to TCJA. We encourage you to contact us with any questions or concerns you may have related to these changes and how they might affect you specifically. For such inquiries, or for information about our services, please contact us at firstname.lastname@example.org or (212) 245-5900.
To read more about the 2018 Estimated Tax Penalty Waiver, please click here for the IRS press release.