Be Careful When Estimating Income Taxes
Taxpayers may be liable for an underpayment penalty if they don’t pay enough “estimated tax” during the year. But a penalty may be avoided if you qualify under one of the tax law’s safe-harbor rules.
Feb. 12, 2019
Taxpayers may be liable for an underpayment penalty if they don’t pay enough “estimated tax” during the year. But a penalty may be avoided if you qualify under one of the tax law’s safe-harbor rules.
IRS offers tax waiver. Significantly, you don’t owe an estimated tax penalty for the year if you’ve paid at least 90% of your current tax liability. However, due to the massive changes in the Tax Cuts and Jobs Act (TCJA), you might have fallen short of this threshold if you didn’t adjust your withholding. Now the IRS says it will waive the penalty if your payments equaled at least 85% of your tax liability (IR-2019-03, 1/16/19). This temporary change may provide relief on 2018 returns.
AICPA requests more relief. Did the IRS go far enough with the new estimated tax waiver? Not according to the American Institute of CPAs (AICPA). The AICPA recently sent a letter to Chuck Rettig, IRS Commissioner, urging the IRS to provide additional tax relief in the wake of the TCJA. Specifically, the AICPA requested that the safe-harbor rule based on current tax liability be lowered to 80% instead of 85%. Also, it asked that the safe-harbor rule based on 100% of the prior year’s tax liability (110% if AGI exceeded $150,000) be lowered to 80%.
Take the long view. Most taxpayers rely on the estimated tax safe-harbor rules based on 90% of your current tax liability (85% for 2018) or 100% of the prior year’s tax liability (110% if your AGI exceeded $150,000) But there’s another option if you receive most of your annual income from year-end holiday sales. In that case, you can use an “annualized method” based on 90% of your current liability. The annualized method enables taxpayers to pay less tax early in the year and more later in the year to reflect actual income flow.