WASHINGTON — Despite claims that it would be simple, the Tax Cuts and Jobs Act has proved to be anything but.
The new law changed the tax rates and brackets, and it increased the standard deduction. But it also removed personal exemptions and limited or discontinued certain deductions. These changes resulted in lower taxes owed for some. But for others, it's meant higher taxes — and in many cases, it's led to getting an unexpected tax bill this year.
And if you didn't pay Uncle Sam enough during the year, you could be hit with an underpayment penalty.
We have a pay-as-you-go tax system. As a wage earner, this means you pay your federal income tax by having it withheld from your paycheck throughout the year. What you pay is based on the number of allowances you claim on your W-4.
It's up to you to determine how many allowances to take. Allowances are based on your anticipated tax deductions such as mortgage interest, charitable gifts or deductible medical expenses.
When there are changes to your life that could impact your tax situation — you get married, have a child or purchase a home — you may need to fill out a new W-4 form.
Because of the tax reform enacted in 2017, many people should have checked their withholdings to make sure they were having enough taken out to cover their tax obligation.
The IRS has tried to get folks to review their withholdings through its "Paycheck Checkup" initiative. The agency issued consumer alerts pointing out that the updated federal tax-withholding tables released in early 2018 didn't fully factor in some changes, such as reduced itemized deductions.
The IRS initially said in January that it would waive the tax penalty for taxpayers who paid at least 85 percent of their total tax liability during the year through federal income-tax withholding, quarterly estimated tax payments or a combination of the two. The usual threshold is 90 percent to avoid a penalty.
Turns out that wasn't enough relief. So last week, the IRS said it would now waive the penalty for people who paid at least 80 percent of what they owed.
"We heard the concerns from taxpayers and others in the tax community, and we made this adjustment in an effort to be responsive to a unique scenario this year," IRS Commissioner Chuck Rettig said in announcing the penalty relief.
The IRS says the revised waiver percentage will be integrated into commercial tax software and reflected in a revision of the instructions for Form 2210, "Underpayment of Estimated Tax by Individuals, Estates, and Trusts."
If you already filed your 2018 tax return and now qualify for the expanded relief, you need to file IRS Form 843, "Claim for Refund and Request for Abatement." On line 7, include a statement that says "80 percent waiver of estimated tax penalty," according to the IRS. You have to mail the form. You can't file it electronically.
Here's one thing you should do now that might improve your tax situation for 2019: Check your withholding to make sure you're having the right amount of money withheld for taxes.
For instance, if you're carrying high-interest credit-card debt, don't intentionally get a large refund. Instead, get your money during the year and pay down that debt by updating your W-4. As of March 15, the average refund was $2,957.
To help people do a paycheck checkup, the IRS offered a free 60-minute webinar in English and Spanish. The session walked through how to use the IRS "Withholding Calculator." There was also a live question-and-answer period following the online presentation.
Here are some of the situations that might necessitate a change in your withholding, according to the IRS:
- You had a large refund for 2018.
- You ended up with a tax bill for 2018.
- You're not sure about the adjustments you made to your withholding.
- You've itemized in the past, but this year took the higher standard deduction under the new law.
- You got married or had another major life change.
- You have outside income not covered by withholding.
- You are a two-wage-earning household.
- You receive a pension or Social Security.
It's still early enough in the year to help position yourself for a less frustrating 2019 tax season. But it starts by checking your paycheck.