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.
Believe it or not, the 2019 tax season is almost here! The Internal Revenue Service has been working for months to be ready to process more than 150 million tax returns that will be filed for the 2018 tax year. Meeting the deadline could be tight — hundreds of forms, instructions, and publications required updating because of the Tax Cuts and Jobs Act, passed in December 2017.
We are still waiting to see all the new forms, but the IRS circulated a copy of the new Form 1040 to the tax community not long ago. The new 1040— about half the size of the current version— would replace the “old” Form 1040, Form 1040A and Form 1040EZ. Consolidating the three “old” versions allows all taxpayers to use the same form.
Here’s what you can expect to see on your 2018 individual income tax return:
- The new Form 1040 uses a “building block” approach that reduces the return to one simple form that is supplemented with additional schedules if needed. Taxpayers with simple tax situations will only file this new 1040 with no additional schedules.
- Several additional new schedules have been developed to supplement the new Form 1040 to report other income, adjustments, credits, and items that appeared on the longer, “old” version of the Form 1040.
- The new schedules are designated by numbers instead of letters. Here’s a quick overview of the new schedules and what they are for:
- Schedule 1 is for taxpayers with additional non–wage sources of income or adjustments to income, such as IRA contributions, student loan interest, and health savings account contributions.
- Schedule 2 is for taxpayers with additional taxes, such as alternative minimum tax or excess advance premium tax credit repayment.
- Schedule 3 is for nonrefundable tax credits such as the foreign tax credit, education credits or residential energy credit.
- Schedule 4 is where taxpayers will add up certain taxes, such as self-employment tax, and household employment taxes.
- Schedule 5 is to add up tax payments, such as estimated tax payments or amounts paid with an extension.
- Schedule 6 is used to report a foreign address or appoint a third-party designee to discuss the tax return with the IRS on your behalf.
Will the IRS be ready for the 2019 tax filing season? If changes to the Form 1040 are any indication, it could be a tight dash to the deadline. Have questions? Check out www.irs.gov or call your tax professional.
Around this time every year, there’s a lot of talk about taxes at home, at work, and on TV. Those tax talks have become more urgent with the December 2017, passing of the Tax Cuts and Jobs Act. The new tax law impacts every individual and business taxpayer. How it impacts you and your tax bill depends on many factors – family size and composition, income sources, and geographic location.
One thing is for sure, answers about how the new law will impact your tax bill are not quick or easy. Figuring it out will take some patience and time. A lack of patience and a rush to act may backfire on some taxpayers. How to interpret the new law is not entirely clear. Remember the lines to pre-pay real estate taxes in high-tax states? The IRS announced those payments would not be deductible without a tax bill in hand. Some tax experts disagree. Who is right?
Less than a month after passing a new law is too soon for all the details and unintended consequences to be fully explained. The Tax Courts are filled with cases where each party is interpreting the law differently. However, some tax projection calculators are available to help many taxpayers determine what their new income tax bill will look like. One issued recently by the Tax Policy Center appears to be easy to use – http://tpc-election-calculator.urban.org/.
An online tax calculator cannot address all possible scenarios and considerations. Taxpayers with more complex situations and decisions, such as business owners, should schedule a consultation with a qualified tax professional. For a tax professional to serve your needs, be prepared to discuss your current family, income, business, and investments. Also share information about impending or planned changes in your situation. Those details make a big difference in the tax advice that is right for your situation.
Your tax professional will use the information you provide to project, analyze, and identify tax planning opportunities based on your situation. Figuring it out takes patience and time. Yes, it’s still too early to know all the details about the Tax Cuts and Jobs Act. But being patient and investing time with a qualified tax professional will get you started on the right track.