The IRS announced last Wednesday it will waive the penalty for taxpayers who didn't withhold enough tax in 2018 but still paid at least 85% of their tax liability—a change from the 90% taxpayers normally have to pay.
The IRS decided to waive the penalty due to the numerous changes in the tax code resulting from the Tax Cuts and Jobs Act (TCJA).
2018 tax changes
The federal income tax is a pay-as-you-go tax determined by filing status and the number of withholding allowances claimed. The TCJA introduced a whole laundry list of changes to how Americans filed their taxes, from increasing the standard deduction to altering tax rates and brackets and eliminating most personal tax exemptions. For the 2018 tax year, for example, the law nearly doubled the 2017 standard deduction amounts to $12,000 for single filers and $24,000 for joint filers.
Standard Deduction Change from 2017
|Your Filing Status||2017||2018|
|Married filing separately||$6,350||$12,000|
|Married filing jointly||$12,700||$24,000|
|Head of household||$9,350||$18,000|
Because of the these changes to the tax code, the IRS has asked taxpayers to review their W-4 forms to make sure they are withholding sufficient taxes from their paychecks, as workers usually adopt a "set it and forget it" attitude toward their withholding, and their inaction could potentially cause them to underpay their taxes for the year.
Here’s an example of how tax reform will change withholding amounts: Maria is single with no dependents, and she earns $50,400 in 2017. On her W-4 she lists two withholding allowances. Her company pays her twice a month. The federal income tax withholding amount is $242 for each paycheck for a total of $5,808 being withheld for the year. Maria’s tax liability for 2017 is $5,739, with one personal exemption and the standard deduction.
Here’s how Maria’s withholding will change under the new tax law: Maria earns $50,400 in 2018. Her two January paychecks will reflect the old withholding rate of $242. If Maria’s employer uses the 2018 withholding table for the first February pay period, the withholding rate will drop from $242 to $185 per paycheck. Maria’s total withholding for 2018 will be $4,554 and her tax liability for 2018 will be $4,418. In other words, in 2018, Maria’s withholding decreased by $1,254 ($5,808-$4554) and her tax liability dropped by $1,321 ($5,739-$4,418).
Taxpayers who paid less than 85% of their tax liability in 2018 will still have to pay the underpayment penalty of 6%. To calculate how much you owe, take a look at the IRS's income tax withholding calculator or tax tables.