As a taxpayer in the United States, you have a legal obligation to pay income tax throughout the year before settling your annual tax account through your 1040 return. If you’re an employee, this is done through withholding tax, while self-employed people may make tax payments in installments. Tax law usually requires that you meet 90% of your tax obligation through either of these methods or a combination of both. For the 2018 tax year, the Internal Revenue Service announced that it is generally waiving penalties for people who have met 85% of their tax liability. This is due to changes coming from the Tax Cuts and Jobs Act (TCJA).
2017 Changes to Tax Laws
The TCJA is a complex piece of legislation that altered much about how your taxes add up. The IRS has warned for months that tax withholding may be an issue this tax year. They encouraged taxpayers to check how their withholding held up in light of the new laws. So far, it appears that refunds are about 8% smaller this tax season. This also means that people used to refunds may have to pay out at tax time. It’s this factor that may make some people fall below the 90% rule.
Two of the biggest changes to tax law surrounded lower tax rates for some people and an increased standard deduction. The net effect for many is that there was less tax withheld from their paychecks. It appears that many taxpayers have a greater liability than withholding assumed. This is because other factors in the TCJA increased tax liability through other provisions. For instance, the law reduced some itemized deductions and suspended dependency exemptions. These increase the amount of taxable income for many. It still seems that many taxpayers will receive refunds. However, these may not be as large as in past. Some people who formerly saw small refunds may now be in a tax payment position.
The U.S. taxation system bases on the pay-as-you-go principle, meaning that you pay income tax as you earn income through the year. There are penalties for not meeting certain levels of compliance. In normal tax years, you escape penalty if:
- your tax payments through the year amount to 90% of your current tax liability
- your tax payments were 100% or more of the previous year’s tax liability
For the 2018 tax year, the IRS exemption uses the 85% rate for the first of these situations. If, however, you do not meet the 85% threshold, the IRS still calculates the penalty based on the 90% amount.
Reviewing Your Tax Withholding Amounts
While it’s too late to make changes that affect your 2018 taxes, you can still adjust your withholding amounts going forward. You may want to review this is your refund is smaller than expected this year, or if you have a tax balance owing. The IRS has updated its Withholding Calculator for 2019. You can review your current status at this website. Changes made early in 2019 assure you the least impact from payday to payday. Making changes later in the year mean less time to build your tax threshold, making a bigger impact on your take-home pay.
To use the IRS Withholding Calculator, collect your most recent pay stubs, and your most recent income tax return. If you haven’t yet completed this year’s return, last year’s will work. Keep in mind, however, that the calculator’s accuracy is only as good as the data you use. You can use the Withholding Calculator to test what-if scenarios as well, since there’s no need to enter personally identifying information. Data entered into the calculator isn’t recorded or saved by the IRS.
In the event you wish to revise your tax withholding situation, file a completed Form W-4 with your employer or Form W-4P if you receive pension income.