28 Jan Will You Be Subject to an Estimated Tax Penalty This Year?
Earlier this week, the IRS posted a notice stating that they would be waiving many estimated tax penalties this year. The Tax Cuts and Jobs Act—which applies many changes to your taxes this year—caused many individuals to have less withheld from their paychecks, which may have led to taxpayers accidentally underpaying throughout the year. The IRS is aware that there may have been confusion among taxpayers regarding how much to withhold from their earnings, and is making accommodations so that innocent mistakes are penalized. Here’s what you should know about estimated tax penalties and this year’s waiver.
About Estimated Tax Penalties
Our tax system works on a pay-as-you-go basis; this means you’re expected to pay your taxes as you earn money throughout the year, rather than paying it all in one lump sum when you file. If you receive a paycheck, your taxes are withheld before you even receive the funds. Business owners are expected to make estimated tax payments throughout the year.
Filing your tax return is essentially a reconciliation of your taxes between you at the government. If you overpaid on your taxes, they’ll send you a return. Those who underpay must send in what they owe; those who vastly underpay are subject to an estimated tax penalty.
How the Waiver Will Work
Not all estimated tax penalties will be waived for the 2018 tax year. Typically, anyone who paid less than 90% of their total tax liability during the year is subject to the estimated tax penalty upon filing their return. But this year, in order to give leeway for any confusion related to the new tax laws and withholdings, only those who paid less than 85% of their tax liability will be subject to the penalty. While this might not seem like a large change, it will give many individuals a chance to get their withholdings in order without being penalized.
What You Should Do
You don’t need to take any special steps in order to receive the waiver. The new threshold and calculations are automatically integrated into our tax software; the updated information will also be included in a revised edition of Form 2210 and its accompanying instructions. As long as you paid more than 85% of what you owed the government in 2018, you will not be subject to a penalty.
However, now is an excellent time to examine your withholdings to ensure that you are paying enough during the tax year. The IRS offers a Withholding Calculator that can help you to correct the amount you’re having withheld from your paychecks. Be sure to have your most recent paystub and a copy of last year’s return on hand in order to ensure the information you input (and the withholding estimate you receive) is as accurate as possible. You can then file a W-4 with your employer to adjust your withholdings as needed.
If you have any concerns about the estimated tax penalty, or about your taxes in general, be sure to set up an appointment with one of our Provo tax preparers today. We will calculate your tax liability and determine if the waiver applies to you, and we’ll help you get your return prepared and submitted as soon as possible.