The US tax system is pay-as-you-go meaning that taxpayers are required to pay their taxes during the year. Employees satisfy this obligation by having taxes withheld from each paycheck. The self-employed make estimated tax payments four times a year.

The law provides for the imposition of an estimated tax penalty against a taxpayer who fails to pay a sufficient amount of tax during the year. The estimated tax penalty can be avoided if: (A) the taxpayer paid either 100% of the previous year’s tax liability so long as it was a 12 month tax year (110% for taxpayers whose AGI is over $150,000), or 90% of the current year’s tax liability, or (B) the tax owed is less than $1,000 after taking into account the withholding or estimated tax payments or (C) the taxpayer had no tax liability for the previous year, the previous year was a full 12 months and the taxpayer was a US citizen or resident during the preceding year.

The 2017 tax law increased the standard deduction and lowered taxes for individuals. The IRS issued new withholding tables in January 2018 to take these changes into account. Under the revised tables, less tax was withheld from taxpayers during the year in anticipation of reduced tax liabilities. However, the withholding tables could not factor in the effect of other changes to the law, such as the suspension of personal exemptions and the reduction of itemized deductions. As a result the IRS calculates that many taxpayers may not have paid enough tax throughout 2018 to avoid the imposition of the estimated tax penalty, unless they amended their W-4 withholding form or adjusted their estimated payments.

In order to grant relief from the estimated tax penalty to those taxpayers who may not have properly adjusted their withholding/estimated payments, the IRS has announced that it will waive the penalty if certain conditions are satisfied. In order to qualify for penalty relief taxpayers have to have paid at least 85% (reduced from 90%) of the tax liability during 2018. The tax payment requirement could have been satisfied through withholding, estimated tax payments or a combination of the two. Any taxpayer whose withholding or estimated tax payment throughout the year was less than 85% of the 2018 tax liability will not qualify for penalty relief, unless another exception applies. If the taxpayer does not qualify for penalty relief, the estimated tax penalty will be calculated as it normally would be.

A waiver of the penalty is requested by filling out Part I of Form 2210 and attaching it to the 2018 tax return. A taxpayer who qualifies for the waiver must also check the waiver box in Part II Box A of the form and include the statement “85% Waiver” on the return.

Now is the time to make adjustments to your withholding or estimated tax payments to make sure you do not risk incurring a penalty for underpayment of taxes in 2019. The IRS has issued a new withholding calculator to help taxpayers determine the proper withholding which you can access by following this link: https://apps.irs.gov/app/withholdingcalculator/