IRS to Waive Underpayment Tax Penalties for Select Taxpayers Due to Tax Reform Changes

The IRS announced it will waive underpayment penalties for the 2018 tax year for a broader group due to changes from tax reform law, commonly known as the Tax Cuts and Jobs Act (TCJA). That’s good news for a large number of taxpayers who may not have properly judged their federal income tax withholding and fell short of their total tax liability for the year.

Waiver Eligibility

Taxpayers won’t face a penalty if they paid at least 85% of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments, or a combination of both.

This is down from the usual 90% threshold typically needed to avoid the tax code penalty, known as Section 6654. The penalty also typically doesn’t apply if a taxpayer’s payments were at least 100% of the prior year’s tax liability. For taxpayers whose adjusted gross income is more than $150,000, or $75,000 if married and filing a separate return, that 100% threshold is raised to 110%.

To request the waiver, a taxpayer must file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with his or her 2018 federal income tax return. 

Tax Reform Impacts on Withholding

Following the passing of the TCJA, the IRS released updated withholding tables in early 2018 to reflect the lower tax rates and increased standard deduction ushered in by the new law. Employers made payment adjustments based on the new tables, and with less tax withheld as a result, many people started to see more money on their paychecks.

The tables, however, didn’t account for the reduced availability of itemized deductions or the suspension of personal exemptions. If a taxpayer didn’t realize this and submit a revised W-4, they may have had less tax withheld for the remainder of the year and not paid enough tax for 2018.

People most at risk of having had too little tax withheld from pay include:

  • Employees with nonwage sources of income
  • Taxpayers who itemized in the past but are now taking the standard deduction
  • Taxpayers with complex tax situations
  • Two-wage-earner households

Most 2018 tax filers are expected to get refunds, but some may unexpectedly owe additional tax when they file their returns.

Looking Ahead

The underpayment penalty waiver is only available for 2018 because of its relation to the first-year issues due to the TCJA. It’s important to review future withholding amounts now, especially for those who ended up owing more than expected this year, to verify the proper amount for 2019.

We’re Here to Help

To determine if you’re eligible for the penalty waiver or have any other questions or concerns following tax reform, contact your Moss Adams professional. You can also view our Tax Planning Guide or learn more on our dedicated tax reform page.