The U.S. Tax System is pay-as-you-go, meaning taxpayers are required to pay most of their tax obligation during as opposed to at the end of the tax year. In order for this to happen, the law requires a taxpayer to pay during the year:
- At least 90% of the current tax year’s amount due, or
- 100% of the amount owed in the previous year.
As many folks were probably aware, the new tax law increased tax payer’s take home pays by lowering withholding rates due to the expected lower amounts in tax due at the end of the year. However, the new withholding rates couldn’t factor in some changes, such as the suspension of dependency exemptions, reduced itemized deductions and others, which has caused some taxpayers to have too little withheld or to pay too little in Estimated Tax Payments during the year.
In response to this, on Wednesday, 01/16/2019, the IRS announced it would waive the penalty for any taxpayer who prepaid at least 85%, rather than 90%, of the current tax year’s amount due through withholding, Estimated Tax Payments, or a combination of the two. This may not seem like much, 90% down to 85%, but something is better than nothing. At least the IRS is trying to work through a major tax overhaul that is expected to be causing some tax headaches this tax season.