by Gregory S. Dowell
The TCJA adjusted the withholding tables in 2018 by reducing the amount of Federal income taxes withheld with each paycheck, putting more cash into the pockets of employees, but creating some surprises for those same employees at tax filing time, who have much smaller refunds than anticipated, or who actually owe tax because the revised tables withheld too little. In response to taxpayers who have been surprised by the amounts they owe when filing their individual tax returns, in January the IRS released Notice 2019-11. This lowered to 85% the amount of tax that an individual must have paid during the course of the year in order to avoid a penalty for underpaying estimated tax. Today (March 22nd), the IRS released Notice 2019-25, which further lowered the percentage to 80%.
As background, the Internal Revenue Code requires that a taxpayer must make certain minimum payments of income tax during the course of the year (a taxpayer is rarely allowed to pay the entire balance due when filing a return). Taxpayers make these payments by having taxes withheld from their wages (if they’re employees), or by making quarterly estimated income tax installments (if they’re self-employed or have substantial investment income). The minimum amount that an individual taxpayer must pay in order to avoid penalties for underpayment is the lesser of 1) 90% of the tax shown on the return for the tax year, or 2) 100% of the tax shown on the taxpayer’s return for the preceding tax year (110% if the individual’s adjusted gross income on the previous year’s return exceeded $150,000). The most recent notice from the IRS effectively lowers the 90% to 80%, so that a taxpayer will not be subject to the underpayment penalty if they had total withholding and/or estimated tax payments made by January 15, 2019 that equal or exceed 80% of the tax shown on the 2018 return. To use this provision, an individual taxpayer must file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with the 2018 income tax return, and check the box in Part II, box A, of the form and include the statement “80% waiver” on the return. If a 2018 return has already been filed for a taxpayer who would have had relief, an amended return will likely need to be filed to remove the penalty.