However, the withholding tables couldn’t fully factor in other changes, such as the suspension of dependency exemptions and reduced itemized deductions. As a result, some taxpayers could have paid too little tax during the year, if they did not submit a properly-revised W-4 withholding form to their employer or increase their estimated tax payments.
Although most 2018 tax filers are still expected to get refunds, some taxpayers will unexpectedly owe additional tax when they file their returns. |
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Because the U.S. tax system is pay-as-you-go, taxpayers are required, by law, to pay most of their tax obligation during the year, rather than at the end of the year.
This can be done by either having tax withheld from paychecks or pension payments, or by making estimated tax payments.
Usually, a penalty applies at tax filing if too little is paid during the year. Normally, the penalty would not apply for 2018 if tax payments during the year met one of the following tests: |
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The person’s tax payments were at least 90 percent of the tax liability for 2018, or |
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The person’s tax payments were at least 100 percent of the prior year’s tax liability, in this case from 2017. However, the 100 percent threshold is increased to 110 percent if a taxpayer’s adjusted gross income is more than $150,000, or $75,000 if married and filing a separate return. |
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For waiver purposes only, the relief lowers the 90 percent threshold to 85 percent. This means that a taxpayer will not owe a penalty if they paid at least 85 percent of their total 2018 tax liability.
If the taxpayer paid less than 85 percent, then they are not eligible for the waiver and the penalty will be calculated as it normally would be, using the 90 percent threshold.
Like last year, the IRS urges everyone to check their withholding for 2019. This is especially important for anyone now facing an unexpected tax bill when they file.
This is also an important step for those who made withholding adjustments in 2018 or had a major life change to ensure the right tax is still being withheld.
Those most at risk of having too little tax withheld from their pay include taxpayers who itemized in the past but now take the increased standard deduction, as well as two-wage-earner households, employees with nonwage sources of income and those with complex tax situations. |
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In addition, various financial transactions, especially those occurring late in the year, can often have an unexpected tax impact. Examples include year-end and holiday bonuses, stock dividends, capital gain distributions from mutual funds and stocks, bonds, real estate or other property sold at a profit.
The IRS encourages taxpayers to perform a quick paycheck checkup by using the Withholding Calculator to check if they have the right amount of withholding for their personal situation.
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A companion publication, Publication 505, Tax Withholding and Estimated Tax, updated for 2018, has additional details, including worksheets and examples, that can be especially helpful to those who have dividend or capital gain income, owe alternative minimum tax or self-employment tax, or have other special situations.
Obviously, help from a tax professional is always the best option in all your dealings with the IRS. Keeping up with our newsletters is, of course, your best option in staying up-to-date with the most important news that may have an impact on your taxes and financial situation. |
