Most taxpayers every year end up getting refunds.
But some folks are at the opposite end of the tax spectrum. They owe Uncle Sam at filing time.
And some of those owing taxpayers end up in an even worse situation. Their tax bills are large enough that they also face added penalty charges.
This filing season, though, those penalty-paying taxpayers could get a break.
Tax underpayment penalty calculations: A tax penalty assessment usually occurs when wage earners don't have enough income tax withheld from paychecks or, if they have other income not subject to withholding, don't pay enough (or any) via estimated taxes.
The tax debt trigger in both these circumstances, as noted in the IRS instruction booklet for Form 1040, generally is $1,000.
That's why one grand is this week's By the Numbers figure.
But there's another amount to consider when it comes to potential tax underpayment penalties — the percentage of your current tax year liability compared to what you owed the year before.
Penalty threshold cut by 5 percent: In normal tax years and filing seasons, a taxpayer who doesn't pay at least 90 percent of his/her tax liability through withholding, estimated tax payments or a combination of the two payment methods can be subject to an underpayment penalty.
However, things on the tax front right now are not normal.
There are the numerous new tax laws, some of which we're just now getting guidance on how to apply. Then there's this filing season, which apparently is about to start amidst a partial government shutdown.
Now the IRS is adding to the many twists and turns by lessening the potential for tax underpayment penalties.
The federal tax agency says this filing season it will, in most cases, waive the tax underpayment penalty for any taxpayer who paid at least 85 percent of their total 2018 tax liability during tax year.
This should reduce the number of people who might have to pay the Treasury extra money this year.
The IRS says the new, lower waiver computation percentage will be integrated into commercially-available tax software, so be sure to update your program before filing. That's always a good idea, but even more important this filing season.
The lower percentage also will be noted, says the IRS, on its forthcoming revision of Form 2210 and instructions. This is the form you use (or our software or tax pro uses) to compute any underpayment penalty you owe.
Note, however, that if you did pay less than 85 percent of what they find during filing that they owe, then they are not eligible for the waiver. The underpayment penalty in these cases will be calculated as it normally would be, using the 90 percent threshold.
2018 withholding issues: The Tax Cuts and Jobs Act (TCJA) is the main reason for the IRS decision to ease some tax underpayment penalties.
In touting the benefits of the TCJA, Republican and White House officials said most of us would face lower tax bill thanks to the new law's lower tax rates and larger standard deductions.
But timing of the largest tax reform bill in more than 30 years created some implementation issues. The TCJA was enacted in late 2017, but applied to the 2018 tax year. That didn't give the IRS much time to start working on implementation of the changes.
Not surprisingly, the tax agency had some issues in quickly integrating the new laws into workplace withholding systems.
Plus, many taxpayers didn't adjust their withholding, or do so early enough, to fully account for the new laws. It wasn't their fault, at least not in early 2018. The IRS said it would take care of the changes and that worker's prior year W-4 form data would be sufficient.
By the time a few months later when the IRS started urging folks to do paycheck checkups and adjust their withholding, many taxpayers weren't paying attention.
The upshot is that some taxpayers may have ended up having too little in taxes taken from their paychecks last year.
And some of those folks — as many as 30 million according to one government estimate — could face painful real tax world effects this filing season.
That definitely is not what the Republican tax writers and GOP Administration want happening, especially since additional IRS employees have been ordered back to work without pay during this historic shutdown. The powers that be want IRS shutdown staff issuing taxpayer refunds, not sending folks notices that they owe.
So the IRS has announced an easing of the penalties.
"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 in announcing the relief.
Pay-as-you-earn taxes and penalties: The reason for payroll withholding, estimated taxes and any associated penalties is the United States' pay-as-you-earn tax system.
Its operation is apparent when you collect a regular paycheck and see income taxes taken out each pay period. The goal is to determine your eventual annual tax liability and then have that amount incrementally withheld, to be sent by your boss to the U.S. Treasury.
The concept is the same when it comes to the four extra estimated tax payments required on earnings that aren't subject to withholding. The IRS wants taxes on this money in preferably equal installments paid each April, June September and January.
Uncle Sam's reason for payroll withholding and estimated taxes is obvious. The federal government needs money throughout the year to do its many jobs.
It's also better for us taxpayers, preventing us from having to come up with a massive lump sum tax payment just once a year.
But when you don't make your pay-as-you-earn tax payments, you could face penalties. These added tax charges are Treasury's, IRS' and Uncle Sam's way of making it financially and sometimes painfully clear that we should be paying, and paying the correct amounts, of our taxes throughout the year.
One-year reprieve: Given the TCJA and other circumstances, the IRS grant of relief is welcome.
If you can benefit from this tax relief, good. But don't get used to it.
The 2018-2019 concerns, both tax and political, are unique. By this time next year (if the government is open …), we'll have been through a tax season under the TCJA changes and we taxpayers, tax pros and IRS will have a better handle on things.
And by then, Uncle Sam will want to once again have access to the full potential of any and all money he can get, including tax underpayment penalties.
For now, however, take the break AND take steps to ensure that you're not in the same underpayment situation for the 2019 tax year.
Recheck your withholding now: "We urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019," said Rettig.
Those most at risk of having too little tax withheld tend to be folks who itemized in the past but now take the increased standard deduction, as well as two-wage-earner households, families with new tax-credit eligible dependents, folks employees with non-wage sources of income (typically investments) and those do gig work, either full-time or to supplement their wages.
Whatever your situation, You can use the IRS' online payroll withholding calculator to figure your more accurate withholding amount.
Then give your payroll office the correct data using the IRS' newly issued W-4 form. There's no limit — except maybe your payroll administrator's patience — on how often you can make withholding changes.
I know it's no fun to get a smaller paycheck. But it's even less fun to have to hand Uncle Sam more at tax time because you didn't pay the correct amount of income taxes during the year.
You also might find these items of interest:
- Tax penalties increased for inflation in 2019
- Navigating the 3 estimated tax penalty safe harbors
- Fed shutdown underscores why to adjust payroll withholding
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