Thursday, January 17, 2019


Here is what the IRS had to say in yesterday’s IR-2019-03 (highlight is mine) -

The Internal Revenue Service announced today that it is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.

The IRS is generally waiving 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 to avoid a penalty.”

This move is in response to the fact that the new withholding tables for 2018, created to reflect the changes made by the GOP Tax Act, were, as I suspected, a bit too "liberal", to make taxpayers think the Act was putting more money in their pockets than it actually was, and the fact that most taxpayers did not properly revise their withholding to properly cover the substantial changes made to deductions and the elimination of the personal exemption deduction.

When I first saw the headline, I was excited.  But not after reading the 2nd paragraph.  While reducing the penalty threshold from 90% to 85% is a good and welcomed action, and will provide some relief to applicable taxpayers, some of my clients included, it is not a big deal.  I would have liked more.

Taxpayers still have two other ways to avoid or reduce penalties for underpayment of federal estimated taxes –

* if the 2018 payments, via withholding and/or estimated payments, is 100% of the 2017 tax liability (110% if the 2017 AGI was over $150,000 or $75,000 if Married Filing Separately), and

* “annualizing” income and deductions for the year to determine the specific tax liability for each of the 4 estimated tax periods and applying actual payments made for each period.


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