Under Prepaid 2018 Taxes Happens for Many Reasons for an IRS Tax Break
It’s true, 2018 was an interesting year with tax reform going into affect. It is comforting to know there is the potential for an IRS tax break. And, there are many reasons for under prepaid 2018 taxes. The IRS requires taxpayers to pre-pay their taxes for any tax year. This is requirement is through payroll withholding, estimated tax payments or a combination of the two. Employees and retirees generally accomplish this through withholding. And, self-employed individuals and those with investment income by paying quarterly estimated payments.
The late-2017 passage of tax reform that became effective for 2018 and its radical changes added considerable confusion for taxpayers. Therefore, taxpayers found it difficult to determine how much they should prepay for 2018. This confusion is made worse because the existing W-4 that employees use doesn’t compare well to the new tax law. Unfortunately, the design of the tax law has made it difficult for employers to determine the correct withholding. Therefore, the formula does not work well with the new tax law. As a result, there has been ongoing concern by the IRS that many taxpayers will end up owing tax this year when they file their 2018 returns. This is even though they get a tax reduction due to the tax reform changes, and simply because their pre-payments through withholding and estimated tax payments were not enough.
Here is a big reason for under prepaid 2018 taxes. For most of 2018, the IRS was issuing alerts that taxpayers may have been under-withholding because of tax reform and the fact that the taxpayer could no longer rely on the the W-4 to produce a correct withholding amount.
Safe Harbor Payments
Will safe harbor help those who under prepaid 2018 taxes? Taxpayers whose pre-payments are less than certain safe harbor amounts face a penalty. This is a nice IRS tax break. Those safe harbors are:
90% of the current year’s tax liability or 100% of the prior year’s tax liability (110% where the prior year AGI is over $150,000 ($75,000 if married and filing separate returns).
Recently several members of Congress have called upon the IRS to waive underpayment penalties for 2018. On January 16, 2019, although not waiving the penalties entirely, the IRS did change the current year safe harbor from 90% of the 2018 tax liability to 85%, providing a break for some taxpayers.
Penalty Waivers & Exceptions
Even if you don’t meet one of the safe-harbor exceptions, another IRS tax break is a waiver of the penalty for 2018 may apply if you:
- Retirement after Age 62 or Disability in 2017 or 2018.
- You did not make payments because of one of the following situations and it would be inequitable to impose the penalty:a. Casualty
b. Disaster, or
c. Other unusual circumstance.
There are two other exceptions to the penalty for 2018:
- You will not owe a penalty, should the total tax shown on your 2018 return minus the tax withheld be less than $1,000.
- Also, you had no tax liability in 2017, were a U.S. citizen or resident alien for all of 2017, and your 2017 tax return was for a full 12 months. This means it is unlikely you will be subject to an under-prepayment penalty. This is true regardless of the filing requirement.
Mitigating the Penalty
In addition, mitigating the penalty amount is possible where your tax liability and/or tax pre-payments were uneven. The penalty amount may be figuring it in on a quarterly basis.
Who under-prepaid 2018 taxes? Do you have questions?
If you have questions or would like to make sure your withholding and estimated payments are adequate for 2019, please give Alex Franch, Enrolled Agent with the IRS, a call at 781-849-7200. Or, email Alex at firstname.lastname@example.org. With tax season here, we highly recommend that you set up your appointment today! We offer a variety of client discounts to save you money.
Do you have questions as you get ready for tax season?
For any questions about assembling your tax data prior to your appointment, please give this office a call. Call Alex Franch, BS EA at 781.849.7200 or email the office at email@example.com to secure help with your small business accounting needs. Also, you may book an appointment online here and you can meet with any of our tax experts. We are available by appointment at our 3 convenient locations in Norwell, South Weymouth and Dedham, Massachusetts.
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning strategies. Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA). He holds a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance. Alex Franch is a registered representative of, and offers securities and investment advisory services through, Commonwealth Financial Network. He is a registered broker-dealer, Member FINRA/SIPC.
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