February 22, 2019
By: Barbara A. Brown, CPA
For those individuals who by January 15, 2019, paid in at least 85% of their 2018 federal income tax bill through payroll withholding, quarterly estimated income tax payments, or a combination of both, a slight change in the IRS rules for only this filing season may help avoid an underpayment penalty. Eligible taxpayers must meet certain conditions described on the 85% Exception Worksheet of Form 2210 Instructions. Those who qualify will need to compete Form 2210 to request the waiver by checking Box A in Part II, writing "85% Waiver" next to that box, and filing page 1 of Form 2210 with either a paper or electronic return.
Section 6654(a) of the tax code imposes the penalty for failure to make a sufficient and timely payment of estimated income tax. Under Section 6654 (d)(1)(B), the required annual payment is generally the lesser of:
1. 90% of the tax shown on the return for the taxable year or
2. 100% of the tax shown on the return for the preceding taxable year (110% applies here when adjusted gross income exceeds $150,000 for the calendar year.).
Various concerns were raised about under-withholding in 2018 due to the massive tax law changes of the Tax Cuts and Jobs Act of 2017. While the IRS took steps to re-educate the public about income tax withholding during 2018, this may not have been enough.
Section 6654(e)(3)(A) allows a waiver in certain cases:
In general, no addition to tax shall be imposed under subsection (a) with respect to any underpayment to the extent the Secretary determines that by reason of casualty, disaster, or other unusual circumstances the imposition of such addition to tax would be against equity and good conscience.
In response to concerns, the Treasury Department released Notice 2019-11 Relief from Addition to Tax for Underpayment of Estimated Income Tax by an Individual on January 16.
Taxpayers are still being urged to re-check their federal income tax withholding for 2019. The following list from the IRS, although not all-inclusive, describes those especially prone to withholding under-/over-ages: two-income families; people working more than one job or working only part-year; people with children who claim child-related credits; people with dependents age 17 or older; people who previously itemized; people with higher incomes; and people with more complex returns.
Resources include the IRS Withholding Calculator as well as in Publication 505, Tax Withholding and Estimated Tax, Form W-4 (2019) Employee’s Withholding Allowance Certificate and Form 1040-ES (2019) Estimated Tax for Individuals.
Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.