Pay too little in taxes last year? IRS offers relief for underpayment

Many taxpayers saw a bump in their take-home pay last year as a result of the lower tax rates and increased standard deduction thanks to the Tax Cuts and Jobs Act. That’s the good news.

On the other hand, some taxpayers may have had too little tax withheld in 2018, exposing them to potential penalties for underpayment.

The IRS typically applies this penalty on taxpayers who do not pay 90 percent of their taxes throughout the year either through federal income tax withholding, quarterly estimated tax payments or a combination of the two.

This year, however, the IRS will waive the penalty for anyone who paid at least 85 percent of their total tax liability during the year.

According to the IRS, many people did not properly adjust their withholding and estimated tax payments to reflect the many changes in the new tax law.  While updated federal tax withholding tables were released in early 2018, the withholding tables did not fully factor in other changes to the law, 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.

Those most at risk of having too little tax withheld from their pay are:

  • Those who itemized in the past but now take the increased standard deduction;
  • Two wage-earner households;
  • Employees with nonwage sources of income; and
  • Those with complex tax situations.

This is a good time to remind your employees to check their withholding. The IRS has updated its withholding calculator to make it easier to know how much to withhold.

As always, please contact us if you have any questions.

Lindsey Pierce, CPA, is a partner with Antares Group, Inc. She can be reached at lpierce@antarescpas.com.