Many Americans have now filed their first income tax returns under the Tax Cuts and Jobs Act (TCJA). Most of the TCJA provisions went into effect in 2018, to be reflected on individuals’ tax returns filed in early 2019. Due to the many changes to tax laws and forms under the TCJA, some Americans found that the income tax withheld from their paychecks, or paid via estimated payments, was not enough to cover their 2018 tax liability. In response to concerns expressed by Congress, the Internal Revenue Services (IRS) has granted penalty relief for certain individuals.
Why Would Some Individuals Owe Penalties?
Form 1040 (U.S. Individual Income Tax Return) is the tax form that most United States individual taxpayers file each year to report income and deductions and to calculate total tax due. For employees, income tax is withheld from wages and remitted to the government directly by their employers. Self-employed individuals are required to remit their own taxes, usually by mailing a check or making an online payment via the Electronic Federal Tax Payment System.®
Prior to the new penalty relief, individual taxpayers were required to pay the lesser of:
- 90% of their total tax for the current year, as reflected on their current year’s tax return.
- 100% of their total tax from the prior year, as reflected on their prior year’s tax return.
- 110% of the prior year’s tax, if the taxpayer’s adjusted gross income on the prior return was more than $150,000 if married filing jointly, or $75,000 if married filing separately or single.
In addition, 25% of the tax calculated under the above requirement must be paid each quarter throughout the year. For employed individuals who have income tax withheld from their paychecks, the withholding is presumed to be made evenly each quarter.
Failure to meet all of these requirements will result in the taxpayer owing penalties on underpayment of estimated tax.
What Relief Has the IRS Provided?
During 2018, many taxpayers had difficulty calculating their tax liability due to the numerous changes and complexities of the TCJA. Unfortunately, though many taxpayers strove to be compliant and pay their taxes when due, they missed the mark and ended up underpaying. Congress expressed concern that well-intentioned taxpayers could be penalized, so the IRS responded with two notices to offer relief.
The first, Notice 2019-11, issued January 15, 2019, granted penalty relief for individual taxpayers who remitted income tax payments no later than January 15, 2019, that totaled at least 85% of the tax reflected on their 2018 tax returns. The income tax payments could be paid via employer withholding or via taxpayer-initiated estimated tax payments.
The second, Notice 2019-25, issued March 22, 2019, provided an expansion of the first Notice but reduced the threshold to 80%. Under Notice 2019-25, individual taxpayers who paid at least 80% of their 2019 tax liability by January 15, 2019, were eligible to avoid penalties on underpayment of estimated tax. This Notice also stated that individual taxpayers were not required to have made any payments for the first three quarters of 2018, and would be considered compliant if they made a payment equal to 80% of the 2018 tax by January 15, 2019, the date of the fourth quarter payment.
The second Notice also provided procedures for filing for penalty relief, particularly if a taxpayer had already filed his or her individual tax return and paid a penalty prior to the issuance of Notice 2019-25. To file for an initial waiver of penalties, a taxpayer would file Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts) with his or her 2018 tax return and check Box A in Part II. A taxpayer who had already filed his or her tax return would file a request for refund by filing Form 843 (Claim for Refund and Request for Abatement), indicating “80% waiver of estimated tax penalty” on Line 7.
Calculating income tax due is complicated for many individual taxpayers and has been made more so by the recent changes under the TCJA. Fortunately, the penalty relief should help take some of the burden off taxpayers who tried “in good faith” to pay their required tax payments during 2018, but missed the mark.
If you have questions about tax penalty relief or tax filing in general, or would like assistance with any matter involving individual or business tax preparation and planning or business management advisory, contact a PYA executive below at (800) 270-9629.
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