Earlier this year, the IRS lowered the underpayment penalty threshold from 90% to 80% to help taxpayers who didn't have enough tax withheld from their paychecks in 2018 or didn't pay enough in estimated taxes last year. As a result, taxpayers could avoid the underpayment penalty this past filing season if their 2018 withholding or estimated taxes equaled at least (1) 80% (as opposed to 90%) of their 2018 tax, or (2) 100% of their 2017 tax (110% if their 2017 AGI was more than $150,000).
This one-time penalty relief offering was deemed necessary because too many taxpayers didn't adjust their 2018 withholding or estimated payments to reflect (or properly reflect) the various tax law changes made by the Tax Cuts and Jobs Act or the updated 2018 withholding tables. However, to claim the penalty relief, you had to submit IRS Form 2210 with your 2018 tax return or, if you already filed your 2018 return and paid the underpayment penalty, request a penalty refund by filing Form 843.
Automatic Relief Now Available
According to the IRS, there were more than 400,000 taxpayers who paid at least 80% of their total federal tax liability through withholding or estimated tax payments but didn't claim the special penalty relief when they filed their 2018 tax return. Will they have to pay the underpayment penalty? No, says the IRS, which will automatically waive the penalty for these taxpayers. Over the next few months, the IRS will notify affected taxpayers of this automatic penalty relief. Taxpayers who already paid the penalty will also receive a refund check whether or not they previously requested a penalty refund. Look for those checks to arrive about three weeks after the notice.
If you requested an extension to file your 2018 federal tax return, you can still claim the penalty relief using Form 2210 when you file by October 15, 2019. If you file electronically, you can take advantage of the waiver computation built into your tax software package.
Act Now to Avoid the Penalty Next Year
Employees hoping to avoid the underpayment penalty next year can increase the amount of tax withheld from each paycheck by giving their employer a new W-4 claiming fewer withholding allowances. If you're already claiming zero allowances, you can also submit a new W-4 to request that an additional amount of your choosing be withheld from each paycheck. Kiplinger's Easy-to-Use Tax Withholding Calculator can help you figure out how many allowances are right for you. The IRS also has a new Tax Withholding Estimator that can help you make sure the right amount of tax is withheld from your paycheck.
If you're self-employed or have other significant sources of taxable income (such as interest, dividends or capital gains), make sure you're paying in enough each time you make a quarterly estimated tax payment.
Copyright 2019 The Kiplinger Washington Editors