As we all gear-up for the 2018 tax filing season – one that will prove to be a challenge as the new and extensive Tax Cuts and Jobs Act (TCJA) changes officially take place – there is much anxiety about whether taxpayers have been withholding properly over the last year. So much so that both the American Institute of CPAs and the National Conference of CPA Practitioners have requested that the IRS suspend the assessment of certain penalties for America’s workers.
One penalty at issue is the under withholding penalty typically assessed against people who did not claim enough withholdings on their Form W-4 with their employers. Our American tax rules require you to “pay-as-you-go” – which means that you are expected to pay taxes on your income as you earn it throughout the year. You are not allowed to wait until the end of the year or when you return is filed. This is why employees are required to have their taxes withheld from payroll checks.
So, if someone fails to ensure that enough tax money was withheld from his or her paycheck it can mean tax balances at tax filing time AND an underpayment (or under withholding) penalty can be tacked onto his or her tax bill – at 5% annually and compounded like interest. The TCJA made dramatic changes to our system. Specifically, to the standard deduction and personal exemptions that most everyday Americans are used to claiming. This is causing many tax professionals . . . including us . . . to be concerned that there will be a massive number of taxpayers who find that they under withheld their taxes from their paychecks last year. And, they will be blindsided with an unexpected tax bill when they file their 2018 income tax returns.
In the past, major tax law changes came with provisions to prevent underpayment penalty assessments in the following year. No such provision was included in the TCJA. What’s being proposed now is a one-time penalty waiver for under withholding to give taxpayers time to adjust and to give the IRS the time needed to get the W-4 form correct before the 2019 tax return filing season in 2020.
If you’re concerned that you may not have had enough income tax withheld from your paychecks in 2018 or if you discover an under withholding when you prepare your 2018 return – don’t panic! Contact us at Bryson Law Firm, LLC to discuss your options! Even if the IRS balks and refuses to suspend the assessment of these penalties – there are other penalty removal remedies already currently available and we are experts at navigating the IRS system. We’ve saved our clients over $56 million in penalties in the past two years!
As a 1/16/2019 UPDATE to this Blog Post, we’re happy to share that as of today, the IRS has announced that they will WAIVE the Estimated Tax Penalty (a penalty imposed for having too little paid in taxes during the year) for many Taxpayers whose 2018 withholdings and/or Estimated Tax Payments weren’t enough to full pay their total tax liability for the year. So long as the Taxpayer paid at least 85% of the total tax owed OR the tax payments were 100% of the prior year’s tax payments/110% if the Taxpayer’s Adjusted Gross Income was more than $150,000, there will be no penalty. According to an IRS News Release, “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.”