Nobody exactly likes paying the Internal Revenue Service, but there’s something even worse than paying taxes.
How about paying a penalty on top of your normal tax liability — just because you had too little money held out from your check during the year?
Fortunately, the IRS is giving you a break this tax season.
Here’s what the IRS is doing this year…
The passage of the Tax Cuts and Jobs Act in December 2017 had an outsize impact on your take-home paycheck.
With the sweeping tax overhaul came new tax tables designed to instruct your employer how much money to withhold from your paycheck. The goal was to make sure you were in compliance with the new law.
Unfortunately, projections show around 3 million people had too little withheld from their paychecks in 2018. That’s according to the non-partisan Government Accountability Office.
The IRS understands there’s still lingering confusion about the tax law. That’s why the agency had decided to waive the penalty on estimated taxes this year — with one big caveat.
Understanding the estimated tax withholding penalty waiver
Historically, you had to have at least 90% of the tax shown on the current year return paid or 100% of the tax shown in the prior year paid to avoid a penalty. (110% if your adjusted gross income was greater than $150,000 married filing jointly/$75,000 as an individual or married filing separately, per IRS Publication 505, Tax Withholding and Estimated Tax.)
But because this is the first year that taxpayers are subject to the new provisions of the Tax Cuts and Jobs Act, the IRS is making an exception.
As a one-time courtesy, the agency is lowering the withholding threshold by 5% for this year only.
So any taxpayer who had at least 85% of their total tax liability withheld during 2018 won’t have to pay an estimated tax penalty.
“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,” IRS Commissioner Chuck Rettig said in a statement.
This one-time pass gives you a good opportunity to check your withholding in 2019 using the IRS Paycheck Checkup tool.
Make sure you’re having enough withheld so you don’t have to pay the penalty next year.
The IRS notes that the waiver computation for this year “will be integrated into commercially available tax software.”
Here are some more articles you might enjoy from Clark.com:
- 8 big misconceptions about the new tax law
- Here are the new 2019 tax rates & income brackets
- See your estimated 2019 tax refund schedule