Individual Underpayment Tax Penalty

On February 28, 2018, the IRS released an updated Withholding Calculator on IRS.gov and a new version of the W-4 to account for changes in the tax rates and brackets of the Tax Cuts and Jobs Act. Because some taxpayers may have been under withheld for 2018, the IRS has expanded the relief provisions for underpaid federal income tax for individuals. Generally, the Code requires taxpayers to pay federal income taxes as they earn income. To the extent these taxes are not withheld, a taxpayer must pay estimated income tax on a quarterly basis. For individuals, estimated income tax is required to be paid in four installments and the amount of any required installment is 25 percent of the required annual payment. Generally, the required annual payment is the lesser (i) 90 percent of the tax shown on the return for the taxable year or (ii) 100 percent of the tax shown on the taxpayer’s return for the preceding taxable year (110 percent if the individual’s adjusted gross income on the previous year’s return exceeded $150,000), so long as the preceding taxable year was a full twelve months long. An individual may not use the tax for the preceding taxable year to calculate the required estimated tax payments if that taxable year was not 12 months long, or the individual did not file a return for that preceding taxable year. The Internal Revenue Code imposes a penalty for failure to make a sufficient and timely payment of estimated income tax.

An individual taxpayer will not be subject to the penalty if an exception or waiver provision applies. A penalty will not be imposed on an individual taxpayer if the taxpayer owes less than $1,000 in tax, after subtracting tax withheld on wages. An individual will not be subject to a penalty if the individual did not have any tax liability for the previous year, the preceding taxable year was 12 months, and the individual was a citizen or resident of the United States throughout the preceding tax year.

The penalty for failure to make estimated income tax payments for the 2018 taxable year otherwise required to be made on or before January 15, 2019, is waived for any individual whose total withholding and estimated tax payments made on or before January 15, 2019, equal or exceed eight-five percent (see above-normally 90%) of the tax shown on that individual’s return for the 2018 taxable year.

To request this waiver, an individual must file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trust, with his or her 2018 income tax return. If the waiver applies, check the waiver box (Part II, Box A) and include the statement “85% Waiver” with the return.

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