May 19, 2019

Spring Tax Cleaning

Over half of the month of May is behind us and for many of you, that means it has been over a month since you thought about the filing of your 2018 federal income tax return. For those of you who filed your 2018 income tax return by April 15th and did not have to extend your filing to October 15th, now may be a good time to take a look at it again. An examination of your 2018 income tax return may remind you that you had to pay an amount due that was larger than you expected. To add insult to injury, you may have also incurred a penalty for underpayment of estimated taxes.

Earlier this year in February, we discussed the imposition of these penalties and exceptions to them. Normally the Internal Revenue Service (“IRS”) expects each taxpayer to have paid income taxes (and/or through withholdings on salaries) in four required installments. Failure to pay 90% of the tax shown on the return can result in penalties. There has always been an exception to the 90% rule for those individuals who filed an income tax return for the previous year. This exception allowed payment of 100% of the prior year taxes (or 110% if a married couple’s adjusted gross income exceeded $150,000).

As I noted in February, the IRS announced in January of this year that it would waive the penalty for underpayment for taxpayers on their 2018 income tax returns if total withholdings and estimated tax payments made on or before January 15, 2019, equaled or exceeded 85% of the tax shown on the 2018 return. On March 22nd, the IRS announced that it would expand the waiver for 2018 income tax returns from 85% to 80%.

For those of you who filed before the IRS announcement expanding the waiver to 80%, you may have still incurred the underpayment penalty if you were under 85% as your amount of taxes paid. If that is the case and you qualified for the expanded relief of 80%, you may claim a refund by filing Form 843, Claim for Refund and Request for Abatement, and include the statement “80% Waiver of estimated tax penalty” on Line 7.