AP NEWS

An update on withholding penalties

March 31, 2019

A few weeks ago, I discussed a problem that many taxpayers were or are facing — an unexpected tax bill and penalty due to insufficient tax withholding. I wrote about special relief that the IRS offered for 2018 returns.

Good news: Last week, the IRS issued a new release that made penalty relief available to more taxpayers. If you haven’t done your taxes yet, or if you filed your 2018 tax return and paid a penalty, read on.

First, sweeping tax law changes went into effect in 2018 as a result of the passage of the Tax Cuts and Jobs Act in December 2017.

Second, the IRS updated tax withholding tables for 2018 “largely reflected the lower tax rates and the increased standard deduction brought about by the new law. This generally meant taxpayers had less tax withheld in 2018 and saw more in their paychecks,” according to an IRS release.

Third, according to the IRS, “(w)ithholding tables couldn’t fully factor in other changes, such as the suspension of dependency exemptions and reduced itemized deductions,” according to the IRS. “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.”

Fourth, in January 2019, the IRS provided for a penalty waiver as temporary relief to help “taxpayers who inadvertently didn’t have enough tax withheld.” At the time, the IRS waived the penalty for any “taxpayer who paid at least 85 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two.” The usual percentage threshold is 90 percent.

Fifth, importantly, on March 22, 2019, the IRS lowered the 85 percent threshold even further, to 80 percent.

Why this change? “We heard the concerns from taxpayers and others in the tax community, and we made this adjustment in an effort to be responsive to a unique scenario this year,” said IRS Commissioner Chuck Rettig. “The expanded penalty waiver will help many taxpayers who didn’t have enough tax withheld. We continue to urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”

Quoting from IR-2019-55: “For waiver purposes only, today’s relief lowers the 90 percent threshold to 80 percent. This means that a taxpayer will not owe a penalty if they paid at least 80 percent of their total 2018 tax liability. If the taxpayer paid less than 80 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.”

To take advantage of the waiver, you need to file IRS Form 2210 with your 2018 tax return. You’ll need to write in “80 percent waiver” on the form to claim relief.

Sixth, be aware that IRS forms and publications (and tax software) are still being updated to accommodate the new 80 percent threshold.

Seventh, what if you already filed your taxes and paid a penalty?

If you qualify for the new relief, you can claim a refund. File Form 843, “Claim for Refund and Request for Abatement.” Complete the form and add the statement “80% Waiver of estimated tax penalty” on Line 7 of the form, advises IRS Notice 2019-25.

What about the future? Do yourself a favor. Take a few minutes to check your withholding for 2019 by using the Withholding Calculator on IRS.gov. Also take a look at the IRS’ “Paycheck Checkup.”

The IRS points out that doing the checkup 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.”

If you would like links to IRS resources, go to my blog at juliejason.com/blog.

If you are in the Greenwich area on April 10, please join me at the First Presbyterian Church at 1 W. Putnam Ave., Greenwich, at 11 a.m. I’ll be speaking about my book, “Managing Retirement Wealth in Good Times and Bad,” hosted by the Retired Men’s Association of Greenwich. The Greenwich Retired Men’s Association offers a free program every Wednesday that is open to the public, both men and women; no reservations are required. Social break starts at 10:40 a.m. followed promptly by my presentation at 11 a.m. For information, visit greenwichrma.org or contact info@greenwichrma.org.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2018 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.