When the Tax Cuts and Jobs Act (TCJA) passed in December 2017, many taxpayers couldn’t foresee the implications of the legislation on their individual withholding for the coming year. The amount of income tax that your employer holds from your paycheck in order to pay the IRS on your behalf is determined using tables published by the IRS and with Form W-4, which you provide to your employer at the beginning of your employment.
However, when the TCJA passed in December 2017, the IRS updated the withholding tables to reduce calculated withholdings. At the same time, some deductions and exemptions were lost. As a result, many taxpayers owed more than normal when filing their 2018 federal income tax returns. Some taxpayers were even penalized by the IRS for not paying enough in taxes throughout the year.
This is because taxpayers are required to pay their income taxes as they earn their income throughout the year. This is done through withholding and/or by making estimated tax payments. If a taxpayer doesn’t pay enough tax throughout the year, they may have to pay a penalty. According to the IRS, this penalty can be avoided if:
- A taxpayer either owes less than $1,000 in tax after subtracting their withholding and refundable credits, or
- If a taxpayer paid withholding and estimated tax of at least 90% of the tax for the current year or 100% (or 110%) of the tax shown on the return for the prior year, whichever is smaller.
Penalty Threshold
Earlier in 2019, the IRS lowered their usual 90% penalty threshold to 85% after complaints from taxpayers regarding higher than normal tax bills. This waived the penalty for any taxpayer who paid at least 85% of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. The penalty threshold dropped even further to 80% in March 2019 after continued complaints from lawmakers.
How to Apply for the Waiver
In August 2019, the IRS said they would start automatically applying the penalty waiver to any eligible taxpayer who already filed their 2018 income tax returns and didn’t claim the waiver. This waiver will be given to any taxpayer who has paid 80% of their total federal tax liability and didn’t already claim the waiver when filing their 2018 return.
If you’ve already paid the penalty, the IRS will be issuing refund checks. You can expect the refund check several weeks after receiving a CP21 notice from the IRS. This process will be automatic. You do not need to contact the IRS or submit a waiver.
However, if you haven’t already filed your 2018 returns, the IRS urges taxpayers to claim the waiver on the returns by using Form 2210.
What About 2019
If you owed more money than usual on your 2018 return, review your withholding status for 2019 with the IRS’s Paycheck Checkup or Tax Withholding Estimator tool or speak with your accountant. Taxpayers shouldn’t count on a similar penalty relief for 2019.
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