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FYI: IRS waives penalty for many whose tax withholding and estimated tax payments fell short in 2018


Arcadia
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From IRS https://www.irs.gov/newsroom/irs-waives-penalty-for-many-whose-tax-withholding-and-estimated-tax-payments-fell-short-in-2018

“IR-2019-03, January 16, 2019

WASHINGTON — 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.

The waiver computation announced today will be integrated into commercially-available tax software and reflected in the forthcoming revision of Form 2210 and instructions.

This relief is designed to help taxpayers who were unable to properly adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act (TCJA), the far-reaching tax reform law enacted in December 2017. 

“We realize there were many changes that affected people last year, and this penalty waiver will help taxpayers who inadvertently didn’t have enough tax withheld,” said IRS Commissioner Chuck Rettig. “We urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”

The updated federal tax withholding tables, released in early 2018, largely reflected the lower tax rates and the increased standard deduction brought about by the new law. This generally meant taxpayers had less tax withheld in 2018 and saw more in their paychecks. 

However, the withholding tables couldn’t fully factor in other changes, such as the suspension of dependency exemptions and reduced itemized deductions. As a result, some taxpayers could have paid too little tax during the year, if they did not submit a properly-revised W-4 withholding form to their employer or increase their estimated tax payments. The IRS and partner groups conducted an extensive outreach and education campaign throughout 2018 to encourage taxpayers to do a “Paycheck Checkup” to avoid a situation where they had too much or too little tax withheld when they file their tax returns. 

Although most 2018 tax filers are still expected to get refunds, some taxpayers will unexpectedly owe additional tax when they file their returns.”

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1 minute ago, Lanny said:

The other side of this is that the majority of taxpayers are getting Refunds and they are huge. As I recall, almost $3000 USD.  

 

That was true last year, as it is true in general. What it will look like THIS year is yet to be determined. The lack of predictability is a problem, and they did a very bad job rolling out the tax changes, as even our CPA has had to guess all of 2018 as to what many of the rules are, as many important issues were not clarified until very late in the year if ever. It makes our 2018 taxes even more of a "black box" than they always are (as small business owners with lots of year end calculations by the CPA required to have a good idea of what our actual taxes will be.)

Be especially careful looking at "averages" because, as we know, an average is very skewed by BIG numbers at the high end. The median would be more relevant. 

https://www.nytimes.com/2019/01/27/us/politics/tax-refund-code-shutdown.html

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42 minutes ago, EKS said:

I'm just going to take this opportunity to say that if you pay all of the tax owed by April 15, there should be no penalties.

 

I think there are still penalties if you didn't withhold or prepay enough, even if you pay on time?  Someone correct me if I am wrong?

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This could actually be huge for me.  I think I underestimated our taxes and we might owe a good bit.  I am technically self employed but I have never had to prepay because of the child tax credit and four kids. While we didn't have a refund, our liability still fell a little under $1,000 so we didn't have a penalty.  I forgot about DS turning 17 this last year (it drops the child tax credit), so I should have prepaid, I think?  Either way, I am relieved, haha.

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2 hours ago, Lanny said:

The other side of this is that the majority of taxpayers are getting Refunds and they are huge. As I recall, almost $3000 USD.  

How would you possibly know that at this point in time? Nobody knows for sure what will happen until the majority of returns are filed because that is when withholding and estimated payments are reconciled with tax returns. Many articles have been written about the uncertainty of what is going to happen this filing season due to the major tax law changes.

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12 minutes ago, Attolia said:

 

I think there are still penalties if you didn't withhold or prepay enough, even if you pay on time?  Someone correct me if I am wrong?

 

Penalty still applies. IRS just give a bigger margin for error in estimating withholding before imposing a penalty. We owe a little last year and paid more than 90% of our tax already in withholding so we didn’t get a penalty. We would owe again this year but should be safely in the paid more than 90% in withholding category but it’s nice to have a bigger buffer.

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18 minutes ago, Frances said:

Yes. They’ve only reduced the threshold from 90% to 85%.

 

11 minutes ago, Arcadia said:

 

Penalty still applies. IRS just give a bigger margin for error in estimating withholding before imposing a penalty. We owe a little last year and paid more than 90% of our tax already in withholding so we didn’t get a penalty. We would owe again this year but should be safely in the paid more than 90% in withholding category but it’s nice to have a bigger buffer.

 

I guess I will just cross my fingers that I am still in range, agh.  🤦‍♀️

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22 minutes ago, Frances said:

How would you possibly know that at this point in time? Nobody knows for sure what will happen until the majority of returns are filed because that is when withholding and estimated payments are reconciled with tax returns. Many articles have been written about the uncertainty of what is going to happen this filing season due to the major tax law changes.

 

I read that, a month or two ago. As I recall, the average refund will be approximately $2850 USD.  I think that number came from the IRS but am not positive about that.

Edited by Lanny
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44 minutes ago, Attolia said:

I think there are still penalties if you didn't withhold or prepay enough, even if you pay on time?  Someone correct me if I am wrong?

Yes, there are. 

Sorry, when I said "there should be no penalties," I meant that there are penalties, but that I think that the fact that there are is stupid.

Edited by EKS
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33 minutes ago, Lanny said:

 

I read that, a month or two ago. As I recall, the average refund will be approximately $2850 USD.  I think that number came from the IRS but am not positive about that.

 

 I would really like a refund 😂  Instead I will just pay several thousand if I am lucky 😫. Darn Self employment tax.  

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2 minutes ago, Attolia said:

 

 I would really like a refund 😂  Instead I will just pay several thousand if I am lucky 😫. Darn Self employment tax.  

 

The worst, right? We had 2 years of owing because we weren't getting the estimation right. After that, I just started throwing money at it. We withhold way more than needed (as in we have gotten 4-7k back for the last few years). I know common wisdom is not to over-withhold, but I don't care. I'm scarred from seeing big bills.

I don't love the mystery involved in this tax season, but I hope my strategy helps with the transition. I still don't understand how the increased child tax credit is supposed to make up for losing our personal/dependant credit. Especially for former itememizers. I think it's going to be ugly for anyone with college/late highschool aged kids. We would have gotten 5 dependant/personal deductions, but we only have 2 child-tax credit kids.

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3 minutes ago, Kalypso said:

We definitely fall in the category of those not benefiting from the tax changes. It such a puzzle to figure this out.

 

The SALT deduction limit affects people with high state tax, high mortgage and/or property tax.

For my family, having negligible mortgage and the higher standard deduction has even out for us. The lowering of the tax brackets and raising the minimum before AMT is activated has also been a help. It depends so much on each family’s tax situation. 

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I just did our taxes today and we are ones who have benefited from the changes but it's seems insane. We didn't receive the child tax credit last year but did this year. We received the full $2000 for our 16 year old and $500 for our college kid. We made $11000 more than the previous tax year but paid $1000 less in federal taxes and are still getting quite a big refund. I'm sure I'm supposed to be happy about the money but it just seems off to me.

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6 hours ago, Kalypso said:

We always get a refund. This year, we will owe $2000-3,000. We definitely fall in the category of those not benefiting from the tax changes. It such a puzzle to figure this out.

This is us, too. DH had planned for a nearly $3000 refund, but we're going to owe closer to $4000. That's a $7000 shift in our budget!

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8 hours ago, Attolia said:

This could actually be huge for me.  I think I underestimated our taxes and we might owe a good bit.  I am technically self employed but I have never had to prepay because of the child tax credit and four kids. While we didn't have a refund, our liability still fell a little under $1,000 so we didn't have a penalty.  I forgot about DS turning 17 this last year (it drops the child tax credit), so I should have prepaid, I think?  Either way, I am relieved, haha.

Yes you lose the big child credit for that child but for the younger ones it goes up to $2000 each (was previously $1000 each) and you can get a $500 for older dependents.  I don't have all my numbers yet but right now it looks like our refund will be bigger.

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I really have no idea what will happen to us.  I think we may get a 500 dollar credit for our college daughter/???( not sure if that is income dependent).  In our case, for last year we lose 3 exemptions, do not get any benefit from larger itemized deductions since we still claim more than 24K (biggest chunk of that is charity---we strongly believe in helping others, helping save the environment, helping cultural institutions, etc) but I think tax rate went down.  We do not live in a high tax state so we won't be affected by the limitation of 10K, I believe. We did not have enough expenses to claim medical whether it was 7.5 or 10%.  

So last year the IRS sent us a notice that we owed them some penalty or there had been some error, I can't remember which.  We had paid several thousand dollars with our return since we did owe more money than from withholding.  We sent them a check and then last fall, they sent us money back, saying they were mistaken.  It was all really weird.

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23 hours ago, EKS said:

I'm just going to take this opportunity to say that if you pay all of the tax owed by April 15, there should be no penalties.

 

This is incorrect. Many things can result in penalties during the year if you don't do them right, even if you send in all your taxes by April. There are numerous ways to owe penalties for under-withholding or under-paying estimated taxes, and I'm sure there are lots of other ways that I haven't had the pleasure of discovering, lol. 

You can likely avoid LATE FEES by paying by April 15, but not all penalties, for sure. 

If you pre-pay last year's tax burden PLUS 10% *during the year that ends Dec 31*, that (generally) puts you in a "safe haven" where penalties are not assessed even if you owe money. Since our own taxes due are very unpredictable and impossible to accurately calculate before year end, this is what we aim for every year, doing careful calculations quarterly to make sure we stay on track for "last year plus 10%" to avoid the easiest way for penalties to be assessed. 

If, for instance, we earned 100k last year and owed 10k in Federal taxes, then this year, if we pre-paid (by Dec 31) 11k, we should be in safe haven and not owe penalties, even if we earned more than 100k (say 120k) and so will owe more in taxes than we pre-paid. But, if we'd only withheld 10k this year, we'd owe the additional taxes PLUS penalties. 

(There may be some ways to lose your safe haven if you are ridiculous . . . but I've never been a ridiculous tax payer, lol. We do our best to comply with the rules. I.e., I can't guarantee that safe haven applies if you earned 10k last year and 1 million this year . . . I have no idea.) 

Also, if you use "estimated" quarterly tax filing (ie., you own your own business) instead of using the standard withholdings on your paycheck, you can get assessed penalties for not withholding enough throughout the year (they penalize you for under withholding early in the year and then trying to make up for it at year end) Since our own income includes both regular payroll withholding and other income that would typically lead to quarterly estimated payments, we actually use a "trick" to avoid the risks of THIS particular penalty by completely avoiding the quarterly payments and instead having extra withheld from our paychecks -- which thereby avoids that particular penalty risk, as with regular payroll deductions, you can do it all at year end if need be. (And, indeed, some years we've had to ramp up our last few paychecks to put all or nearly all of them into withholdings. This trick is quite handy for us since we often have no idea what our taxable income will be until the accountant is finished with our taxes. Even though we have quarterly reviews to do our best to estimate . . . At least with this trick, we can avoid the risk of penalties.) 

Anyway, I'm sure others with other types of income and issues face OTHER penalties, but I can speak to these couple, lol. 

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Interesting. I wasn't aware of the $500 "family credit" for older dependents.  Between that and the AOTC for my two college-are DC, our total federal income tax liability will likely be very low. Or not; I'm not sure how that balances against the loss of the personal exemptions.  I have some forms not coming until sometime in February so I haven't started actually plugging in numbers yet.  We only itemized once ever so the higher standard deduction is definitely a help.

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