Changes have been made to the income tax withholding tables and estimated tax rates as a result of the new Tax Cuts and Jobs Act. Taxpayers should pay extra attention now to their tax withholdings and estimated tax payments in order to avoid penalties.
Taxpayers can generally avoid underwithholding/estimated tax penalties if they:
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- Pay 90% of the current year liability, or
- Pay 100% of the prior year liability.
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However, If a taxpayer’s adjusted gross income for the prior year was more than $150,000, the taxpayer must then have withholdings or estimated tax payments for the current year of at least 110% of their prior year tax liability in order to avoid a penalty. If a taxpayer files an income tax return, and owes less than $1,000, no penalties are due in any event.
Due to changes under the Tax Cuts and Jobs Act, taxpayers may be reporting a higher level of taxable income in 2018, but will have a lower tax liability. As a result, taxpayers who base their 2018 tax withholdings and estimated tax payments on their 2017 tax liability may find themselves with a tax refund. While receiving a refund is better than owing the IRS, taxpayers will have still allowed the federal government to use their money interest-free.
The IRS has a new calculator on its website that can be used to compare a projected 2018 tax liability to annualized withholdings. This is a useful tool that should not be overlooked. If your situation is more complex, you may want to consult with a tax professional to ensure you are “penalty-proof” before you file next year’s tax return.