This Year Many Taxpayers Will Get Underpayment Penalty Relief
What is an underpayment penalty?
If you’ve never heard of it before, you’ll be hearing about it a lot this tax season: The underpayment penalty. This penalty applies when you don’t have enough tax payments withheld from your wages, Social Security or pension benefits.
Most people are unfamiliar because typically they have more taxes taken out than too little. But this year everything is different with the 2017 Tax Cut and Jobs Act. This 2018 tax season is the first when people are getting hit with owing taxes when they are accustomed to getting a tax return. Much of that is a result of under payment of taxes through withholding.
If you owe less than $1,000 in taxes, you don’t have to worry about the underpayment penalty at all. However, the rule is that you pay in at least 90% of the tax you owe or 100% of the tax you owed in the prior year. If your adjusted gross income is $150,000 or more you must pay in 110%. If those percentages are not met you owe an underpayment penalty.
This year, with the TCJA changes, millions of taxpayers could owe penalties.
It has already created a sense of shock for many people who always expect and get a refund to find they owe. The IRS anticipated this which is why in January, they issued Notice 2019-11. In the notice, the IRS expands penalty relief to those whose withholding and estimated tax payments total at least 80% of the tax shown on the return for the 2018 tax year. The Notice also updates procedures for requesting a penalty waiver, and it explains how to get a penalty refund if you’ve already filed.
So, if you owe due to insufficient withholding, make sure you ask your tax preparer if you qualify for the underpayment relief. If you’ve already filed and paid, apply for a penalty refund. It’s a relief this year, but next year I doubt the IRS will be so sympathetic.