In 2017, Congress passed the Tax Cuts and Jobs Act, which promised a tax cut for most taxpayers. Based upon early calculations, the IRS issued tax tables which taxpayers then used to fill out Forms W-4 at the beginning of 2018. It seems now, these tax tables were overly optimistic about the effect of the tax cuts. Consequently, individual taxpayers may have entered information on their W-4 giving themselves more in their take-home pay than they should have been receiving.
The IRS now estimates as many as 10 million taxpayers may be facing penalties for underpayment of estimated taxes when they file their personal 2018 tax returns in early 2019. The good news is, there is still time to correct your withholding and avoid penalties. Taxpayers who pay their estimated taxes through payroll withholding are deemed to pay their taxes evenly throughout the tax year regardless of when the taxes are withheld during the year. Even taxpayers making estimated tax payments still have two additional tax payment dates on September 17, 2017 and January 15, 2019. So, there is also time for those taxpayers to catch up on estimated tax payments.
Individuals with other sources of income, such as investment income, self-employment, or prizes, may find they owe additional taxes and need to make an estimated tax payment. The IRS has developed several tools to allow individual taxpayers to evaluate if they have the proper amount of taxes deposited and withheld. For taxpayers utilizing payroll withholding, the IRS has a paycheck checkup.
Armed with their most recent paycheck information and prior year tax return, taxpayers can effectively use the Withholding Calculator found on the IRS website to check the number of exemptions they should claim on their Form W-4. With the corrected withholding tables, the IRS is asking taxpayers to take a second look at their withholding before year end. This will allow taxpayers to adjust their W-4 to make up for any under withholding in the first three quarters of the year and withhold the correct amount for the fourth quarter. If this does not happen, taxpayers will be responsible for any underpayment penalties when they file their 2018 Form 1040.
For more information about estimated taxes, please contact your Clark Nuber tax advisor or see these additional IRS resources:
- Estimated Tax – frequently asked Questions and Answers
- Form 1040-ES, Estimated Tax for Individuals
- Tax Topic 306 – Penalty for Underpayment of Estimated Tax
- FAQs Estimated Taxes for Individuals
© Clark Nuber PS, 2018. All Rights Reserved