The Tax Relief Center breaks down the IRS’s new threshold for tax underpayment penalty relief and explains why many taxpayers faced underpayments during the last tax year.
RELATED: IRS Penalty Abatement
In this article:
- The Latest Update on the IRS Underpayment Penalty
- What’s Up with Our Estimated Taxes?
- Overview of the Changes Brought About by the Tax Cuts and Jobs Act for Individuals
- The People Who Need to Check Their Withholding Amounts
- What You Can Do to Avoid an Underpayment Tax Penalty
Understanding the 2018 Tax Underpayment Penalty Relief
The Latest Update on the IRS Underpayment Penalty
The IRS has good news for people who’ve encountered underpayment penalties in their 2018 returns. They lowered the tax underpayment penalty threshold from 85% to 80%.
This means if you paid at least 80% of your estimated taxes for the tax year, the IRS will not slap a tax underpayment penalty on you. The IRS further lowered the threshold from 90% and 85%, levels they announced back in January of this year.
What Is Underpayment Penalty? You incur an underpayment penalty if you pay less than the amount of taxes you owe the government.
What’s Up with Our Estimated Taxes?
If you’re one of the many taxpayers who have been waiting for tax refunds but ended up facing a tax underpayment penalty, your tax payments changed after the Tax Cuts and Jobs Act of 2017, or TCJA. Many tax specialists believe the TCJA is the biggest tax reform legislation since the Tax Reform Act of 1986.
The IRS claims they revised more than twice the amount of forms they change annually in 2018 in response to this legislation.
The IRS encouraged business owners to start adjusting their employees withholding tax amounts as far back as February 2018 in anticipation for the changes brought about by TCJA. Overall, the TCJA offers reductions in income tax rates for all of the seven income tax brackets, but the law does away with or minimizes tax breaks.
Overview of the Changes Brought About by the Tax Cuts and Jobs Act for Individuals
This article gives readers a small overview of the TCJA to provide them a clearer picture of why some of them incurred a penalty for underpayment of estimated tax.
1. Reductions in Income Tax Rates for Seven Tax Brackets
The new tax rates begin at 10% and amount up to 12%, 22%, 24%, 32%, 35%, and finally at 37% for the other six brackets. Before the TCJA, the IRS calculated the tax rates at 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
2. An Increase in Standard Deductions
The legislators who worked on the Tax Cuts and Jobs Act wanted to make filing taxes easier. One of the things they worked on was to nearly double the standard deductions:
- Single Filers: $12,000 up from $6,350 before TCJA
- Married Filing Jointly, Qualified Widows and Widowers: $24,000 up from $12,700 before TCJA
- Married Filing Individually: $12,000 up from $6,350 before TCJA
- Head of household: $18,000 up from $9,350 before TCJA
The government has implemented these new standard deductions to encourage taxpayers to opt for standard deductions over itemizing their deductions. Tax experts calculate the time it takes one to complete tax return filing will go down by 4-7%, and give the government savings of up to $3.1 to $5.4 billion.
3. Various Adjustments to Itemized Deductions
Taxpayers who file itemized deductions need to take note of some of the following changes to IRS deductions:
- The TCJA suspends deduction limits for higher-income individuals.
- Taxpayers can deduct unreimbursed medical expenses that go above 7.5% of their adjusted gross income for 2018 and 10% of their adjusted gross income for 2019 tax years.
- The TCJA limits deductions for state and local income, plus sales and property taxes, to a combined amount of only $10,000 or $5,000 for married taxpayers filing separately.
- The TCJA limits mortgage interest payments deductions solely to loans secured by main homes or second homes which loan amounts financed the acquisition, the building, or the improvement of the main or second home.
- The TCJA reduces the amount of mortgage interest taxpayers can deduct to a total of $750,000 or $375,000 for married taxpayers filing separate tax returns down from $1 million in 2017.
- The legislation increased the limit for charitable cash contributions from 50% to 60% of an individual’s adjusted gross income.
- The new law limits deductions for personal casualty and theft losses to federally-declared disasters.
- The TCJA suspended miscellaneous itemized deductions for job-related expenses that rose above 2% of an individual taxpayer’s adjusted gross income.
4. The TCJA Suspends Moving Expenses Deductions
Civilians, or ordinary citizens, can no longer cite the use of an automobile while moving to a new residence as a deduction. In the same vein, employers must add moving expense reimbursements to their employee’s taxable income instead of excluding it from the calculation.
The law excludes military personnel from this particular exclusion. Members of the Armed Forces can still cite the use of automobiles and their moving expense reimbursements as deductions as long as the move is part of a military order to change stations.
5. Suspension of Personal Exemptions
Taxpayers can no longer file personal exemption deductions for themselves, their spouses, or their dependents.
6. Child Tax Credit Modified and Increased
Taxpayers now possess up to $2,000 maximum credit for every child under 17, and $1,400 of this amount can be refundable for each qualifying child.
The IRS lists more salient features of the Tax Cuts and Jobs Act of 2017 in their tax reform online resource.
The People Who Need to Check Their Withholding Amounts
The TCJA features various changes to deductions and exemptions on income that affect the taxable income of several types of individuals. If you’re in one of these categories, the IRS advises you to check your withholding with your employer:
- Member of a two-income family, or you hold more than one job
- You work a seasonal job, or work only a part of the year
- You claim a child tax credit
- Your dependents are 17 years old and above
- You itemize your deductions in your returns
- You are a high-income individual or your tax returns are complex
- You received a sizable tax refund last year
- You received a tax bill last year
If you belong to any of these categories, the IRS advises you to use their Paycheck Checkup Calculator to get a fair estimate of their withholding tax for the tax year.
What You Can Do to Avoid an Underpayment Tax Penalty
The best thing you can do to avoid a tax underpayment penalty is to stay informed of the various changes the Tax Cuts and Jobs Act of 2017 has made on deductions and exemptions. You can do this by consulting resources the IRS prepared for individuals and businesses.
The IRS Paycheck Checkup Calculator should help you see if you’re well within paying your withholding tax amounts due for the year.
If you encountered a tax underpayment penalty as a result of this legislation, you can speak with a tax specialist or a tax advocate. They’ll give you clarity on why your taxes are the way they are now and what steps you can do to avail of tax underpayment penalty relief.
A taxpayer needs up-to-date information on tax law changes so they can fully comply with the updates and avoid a tax underpayment penalty. We hope this article gives our readers an understanding of why underpayments happened and what they can do moving forward to avoid these tax penalties in the future.
How did the Tax Cuts and Jobs Act of 2017 affect your withholding tax? Give us insights on how this tax reform legislation has affected you on the day-to-day so we can help think of solutions and forms of assistance for you.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.