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Underpayment Penalty Relief


On January 16, 2019, the IRS issued some relief from the penalty for underpayment of estimated income tax. Individual taxpayers who paid at least 85% of their total tax liability during the year through federal income tax withholding or quarterly estimated tax payments or a combination of the two will not be subject to the underpayment penalty.

Prior to this relief, under Sec. 6654(d)(1)(B), the required annual income tax payment an individual taxpayer is required to make is the lesser of (1) 90% of the tax shown on the return for the tax year or (2) 100% of the tax shown on the taxpayer’s return for the preceding tax year (110% if the individual’s adjusted gross income on the previous year’s return exceeded $150,000).

In February of 2018, the IRS released an updated withholding calculator as well as a new Form W-4, Employee’s Withholding Allowance Certificate, to assist with the changes due to the Tax Cuts and Jobs Act. This calculator and new Form W-4 may not have made the calculation any easier. Also, other changes, such as the suspension of dependency exemptions and reduced itemized deductions, could not be fully factored into the withholding tables. Because of this, some individual taxpayers may have found it difficult to correctly estimate their 2018 tax liability. As a result, some taxpayers could have paid too little tax during the year. Responding to these concerns, the IRS offered a “85% waiver”.

To request the waiver, an individual taxpayer must file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with his or her 2018 income tax return. The taxpayer should check the waiver box in Part II, box A, of the form and include the statement “85% waiver” on the return.

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