by Alex Gershengorn
August 21, 2019
In some good news for taxpayers, the IRS announced that the relief announced earlier this year, with respect to the individual taxpayer estimated tax penalty for 2018, will be expanded and automatically applied to taxpayers who filed their 2018 returns.
For some background, if a certain minimum amount of estimated taxes is not paid each year, the tax code imposes a penalty on individuals, which is commonly referred to as an underpayment penalty. To avoid the penalty, each of four required installments must equal 25% of the “required annual payment,” which generally is the lesser of: (1) 90% of the tax shown on the individual’s return for that year (or, if no return is filed, 90% of his or her tax for that year), or (2) if the individual filed a valid return for the immediately preceding tax year, 100% of the tax shown on that return, or 110% if a taxpayer’s adjusted gross income was more than $150,000 ($75,000 if married and filing a separate return).
The problem that arose in 2018 was that the Tax Cuts and Jobs Act (TCJA) greatly altered the way that taxes were calculated and also changed the amount of income taxes that were withheld from wages. TCJA was a comprehensive tax overhaul that dramatically changed the rules governing the taxation of individuals, providing new income tax rates and brackets, increasing the standard deduction, suspending personal exemptions, increasing the child tax credit, limiting the state and local tax deduction, and temporarily reducing the medical expense threshold, among many other changes. TCJA also provided a new deduction for non-corporate taxpayers with qualified business income from pass-throughs. Many of the TCJA’s changes impacted the amount of income taxes that were withheld from a taxpayer’s wages. These changes to withholding, coupled with multiple other changes from TCJA, caused many taxpayers to potentially be subject to underpayment penalties.
Under pressure from members of Congress and other groups about the issue of under-withholding, the IRS provided that the estimated tax penalty for the 2018 tax year was waived for individuals whose total withholding and estimated tax payments made by January 15, 2019, equaled or exceed 85% of the tax shown on their 2018 returns. In an acknowledgment that the previous attempt at fairness was inadequate, in March 2019 the IRS expanded the estimated tax penalty waiver that it previously announced, so that it applied to taxpayers who had withholding and estimated tax payments made by January 15, 2019 that were 80% or more of their 2018 taxes, down from 85%.
While that attempt at fairness from the IRS was appreciated, it came too late in the filing season to be completely effective. In the most recent announcement, the IRS indicates that relief will automatically apply to those taxpayers who already filed their 2018 federal income tax returns, and will mail checks to those taxpayers who were affected by the late action taken by the IRS.
The IRS has advised that it will mail notices to taxpayers to grant relief to affected taxpayers. Eligible taxpayers will receive a refund check. The IRS urges persons who have not yet filed for 2018 to claim the waiver on their return. This group includes those with tax-filing extensions due to run out on October 15, 2019.