Tax withholding tables and tax rates changed in February 2018, due to the 2017 Tax Cuts and Jobs Act. Doing a “Paycheck Checkup” was promoted by the IRS and in the news all year to help taxpayers avoid an expensive surprise when filing their 2018 income tax returns in 2019. You’ve been meaning to Checkup on your Paycheck, but it’s already late November.
Will you have to pay a tax penalty if you owe? Maybe not…
To avoid a penalty for 2018, your tax paid or withheld must total 90% of your 2018 tax liability, or 100% of your 2017 tax liability, whichever is lower. Since 2010, the number of taxpayers assessed underpayment penalties and interest has increased by 40%, from 7.2 million a year to 10 million. Interest on unpaid amounts is calculated based on IRS rates, and accrues daily until the amount due is paid. That really adds up!
Here are four ways to avoid tax penalties:
- Increase tax withholdings from wages for the rest of the year by submitting a new IRS Form W-4 and a new state withholding authorization with your employer. Reducing the number of exemptions that you claim increases the amount of tax withheld. Don’t overdo it! Avoid over withholding and giving Uncle Sam an interest-free loan until you get your 2018 refund.
- Pay estimated taxes if you expect to owe at least $1,000, after tax withholdings and refundable credits. Estimated tax payments are normally due on April 15, June 15, September 15 and January 15 of the following year, unless the due date falls on a weekend or holiday. Paying amounts due stops the clock on 2018 interest accruals for those balances.
- Taxpayers who receive income unevenly during the year can make estimated tax payments as funds are earned or received. That means if most of your income comes in during the last few months of the year, you can make lower estimated tax payments earlier in the year and higher payment amounts later in the year.
- Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishermen, casualty and disaster victims, those who recently became disabled or retired. Do your homework to see if you belong in one of these categories.
Think that the IRS loves to charge penalties? No! They want to help taxpayers avoid penalties. Tools are available for a Paycheck Checkup at https://www.irs.gov/paycheck-checkup.