New Rules for IRS Underpayment Penalties in 2018

There will be no estimated tax penalty for 2018 as long as you paid at least 80% of your taxes due.

Taxpayers are supposed to pay most of their taxes in advance during the year. This is done through employer withholding and estimated tax payments. If you don't pay enough tax during the year, you are required to pay an underpayment penalty, also called an estimated tax penalty.

The normal rule is that you're subject to the underpayment penalty if you fail to pay at least 90% of your tax due by January 15. Alternatively, you avoid the penalty if you paid at least 100% of what you paid the prior year (110% if you're a higher income taxpayer with more than $150,000 in income). Also, you are not required to pay a penalty if you owed less than $1,000 in tax.

Unfortunately, as a result of the massive changes brought about the Tax Cuts and Jobs Act, many taxpayers did not have enough tax withheld or paid through estimated tax payments during 2018. As a result, the IRS decided to give taxpayers a break. It announced that underpayment penalties for 2018 would be imposed only if taxpayers paid less than 85% of their tax due. However, due to widespread complaints that this relief was not generous enough, the IRS has now announced that no penalties will be imposed as long as taxpayers paid at least 80% of their tax due.

If You Haven't Filed Your Tax Return

If you haven't filed your taxes yet, you don't have to do anything. If you use tax software to prepare your return, you should wait a few days for the software to be updated to incorporate this new rule. Make sure to update your software to the latest version before you prepare your return.

When you file your 2018 return, it must include IRS Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts. Taxpayers should complete Part I of Form 2210 and check the waiver box (Part II, Box A). Include the statement "80% Waiver" next to Box A. If you use tax preparation software, it should automatically prepare this form with the rest of your return. If a tax pro prepares your return, he or she should prepare the form for you.

If You Already Filed Your Tax Return

If you already sent in your 2018 tax return and paid an estimated tax penalty, you can get a refund for all or part of the amount. You can pay a tax pro to file this form for you, but you can save some money by filing it yourself. It's easy and here's what to do:

  • First, check to see if you paid at least 80% of your 2018 tax due. Line 18 of your Form 1040 shows your total payments. Line 22 shows the total tax due. Divide Line 18 by line 22. If the total is 80% or more, you're due a refund of your underpayment penalty. The amount of the penalty you paid is in line 23.
  • To get your refund, you must file IRS Form 843, Claim for Refund and Request for Abatement. Download and print out. Fill it out by hand and include the statement, "80% waiver of estimated tax penalty" on Line 7.
  • Postal mail your completed Form 843 to the IRS on the address shown at the end of the instructions for Form 1040.

This relief only applies for the 2018 tax year. The normal rules apply for 2019 and later. The IRS urges all employees to use it's online withholding calculator to make sure they have enough tax withheld during the year.

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