Tag Archives: new tax law

IRS waives 2018 underpayment tax penalties for many taxpayers

The IRS has some good news for certain taxpayers — it’s waiving underpayment penalties for those whose 2018 federal income tax withholding and estimated tax payments came in under their actual tax liabilities for the year. The waiver recognizes that the Tax Cuts and Jobs Act’s (TCJA’s) overhaul of the federal income tax regime made it difficult for some taxpayers to determine the proper amount to have withheld from their paychecks or include in their quarterly estimated tax payments for 2018.

The new tax system

Many taxpayers started seeing more money in their paychecks in February 2018, after their employers made adjustments based on the IRS’s updated withholding tables. The revised tables reflected the TCJA’s increase in the standard deduction, suspension of personal exemptions, and changes in tax rates and brackets.

The TCJA roughly doubles the 2017 standard deduction amounts to $12,000 for single filers and $24,000 for joint filers in 2018. It also eliminates personal exemptions, which taxpayers previously could claim for themselves, their spouses and any dependents. In addition, it adjusts the taxable income thresholds and tax rates for the seven income tax brackets.

But, as the IRS cautioned when it released the revised withholding tables, some taxpayers could find themselves hit with larger income tax bills for 2018 than they faced in the past. This is because of some of the changes described above, as well as the reduction or elimination of many popular tax deductions. The tables didn’t account for the reduced availability of itemized deductions (or the suspension of personal exemptions).

For example, taxpayers who itemize can deduct no more than $10,000 for the aggregate of their state and local property taxes and income or sales taxes. Itemizing taxpayers also can deduct mortgage interest only on debt of $750,000 ($1 million for mortgage debt incurred on or before December 15, 2017) and can’t deduct interest on some home equity debt.

The higher standard deduction and expansion of family tax credits may offset the loss of some deductions and the personal exemptions. Indeed, the IRS predicts that most 2018 tax filers will receive refunds.

Taxpayers, however, generally can’t be certain how the numerous TCJA changes will play out for them, putting them at risk of underpayment penalties for 2018. The Government Accountability Office last year estimated that almost 30 million taxpayers will owe money when they file their 2018 personal income tax returns due to under-withholding. Those particularly at risk include taxpayers who itemized in the past but are now taking the standard deduction, two-wage-earner households, employees with non-wage sources of income and taxpayers with complex tax situations.

Underpayment penalties

The tax code imposes a penalty (known as a Section 6654 penalty) if taxpayers don’t pay enough in taxes during the year. The penalty generally doesn’t apply if a person’s tax payments were:

  • At least 90% of the tax liability for the year, or
  • At least 100% of the prior year’s tax liability. (The 100% threshold rises to 110% if a taxpayer’s adjusted gross income is more than $150,000, or $75,000 if married and filing a separate return.)

Taxpayers generally can also avoid the underpayment penalty if they owe less than $1,000 in additional tax after subtracting their withholding and refundable credits.

The 2018 waiver

The IRS’s waiver lowers the 90% threshold to 85% — the IRS won’t penalize taxpayers who paid at least 85% of their total 2018 tax liability. For those who paid less than 85%, the IRS will calculate the penalty as it normally would.

To request the waiver, a taxpayer must file Form 2210, “Underpayment of Estimated Tax by Individuals, Estates, and Trusts,” with his or her 2018 federal income tax return.

Shutdown concerns

The IRS already has indicated that it will issue refunds despite the government shutdown that has furloughed about 800,000 federal workers. The IRS is recalling some of its furloughed employees and plans to have about 46,000 of its employees back on the job in the coming days. Those employees represent only about 57% of its total workforce. These employees will be using newly updated systems and forms, which could result in further delays. In addition, they could face an onslaught of questions from taxpayers confused by the TCJA changes.

Moreover, the recalled employees won’t be paid during the shutdown, and declines in morale may hurt productivity. Unpaid workers at other federal agencies have called in sick at higher rates than usual since the government’s partial closure, and the union that represents IRS employees has sued the Trump administration over the pay issue.

Act now for 2019 taxes

The underpayment penalty waiver is effective only for 2018. The IRS is urging taxpayers to review their withholding now to ensure that the proper amount is withheld for 2019, especially taxpayers who end up owing more than expected this year. If you have questions regarding the waiver, please don’t hesitate to call us.

© 2019

IRS updates Priority Guidance Plan for new tax law

The Internal Revenue Service has released an updated Priority Guidance Plan to give tax professionals and taxpayers information about the areas of the Tax Cuts and Jobs Act and other matters where it plans to provide more clarity in the near future.

This third quarter update to the 2017-2018 plan that the IRS issued late Wednesday reflects 13 additional projects, along with information about guidance the IRS has already published during the period from Oct. 13, 2017 through March 31, 2018.

In its initial implementation of the Tax Cuts and Jobs Act, the IRS plans to provide guidance in areas such as the business credit for wages paid to qualifying employees during family and medical leave, along with guidance on reportable policy sales of life insurance contracts.

The IRS also plans to release guidance on the new Section 199A, the deduction of qualified business income of pass-through entities, a murky area of the tax reform law where many practitioners have been demanding guidance. The IRS said in the priority plan it would be issuing “computational, definitional, and anti-avoidance guidance” on Section 199A. The IRS also plans to issue guidance on adopting new small business accounting method changes in its initial implementation of the TCJA. It will also be providing guidance on computation of unrelated business taxable income for separate trades or businesses, as well as changes to electing small business trusts, and on computation of estate and gift taxes to reflect changes in the basic exclusion amount. There will also be guidance coming out on certain issues relating to the excise tax on excess remuneration paid by “applicable tax-exempt organizations.”

The IRS has already released guidance in several areas, including opportunity zones, dispositions of certain partnership interests, withholding and optional flat rate withholding, according to the document.

Another important set of items on the Priority Guidance Plan is President Trump’s executive order withdrawing some earlier Treasury regulations and proposed regulations on matters such as estate, gift and generation-skipping taxes and the definition of a political subdivision.

Last month, the IRS asked the public for input on other items that should be added to the Priority Guidance Plan (see IRS looks for recommendations on priority guidance on new tax law). The update to the plan will identify the guidance projects that the Treasury and the IRS intend to work on as priorities from July 1, 2018, through June 30, 2019.

Staffers on Congress’s Joint Committee on Taxation have also been working on a so-called “Blue Book” that will provide more details on various provisions of the new tax law, along with a set of technical corrections to the tax reform law that they hope to have it in legislative form by the end of the year (see Congressional staff aims to finish technical corrections to tax reform bill). The prospects for passing another tax law anytime soon in Congress are far from certain, although some lawmakers hope to introduce legislation extending the individual tax cuts beyond 2025.

4 New Ways You Can Avoid Fines For Not Having Health Insurance

There are already more than a dozen reasons people can use to avoid paying the penalty for not having health insurance. Now the federal government has added four more “hardship exemptions” that let people off the hook if they can’t find a marketplace plan that meets not only their coverage needs but also reflects their view if they are opposed to abortion.

It’s unclear how significant the impact will be, policy analysts said. That’s because the penalty for not having health insurance will be eliminated starting with tax year 2019, so the new exemptions will mostly apply to penalty payments this year and in the previous two years.

“I think the exemptions … may very marginally increase the number of healthy people who don’t buy health insurance on the individual market,” Timothy Jost, emeritus professor of law at Washington and Lee University in Virginia who is an expert on health law.

Under the new rules, people can apply for a hardship exemption that excuses them from having to have health insurance if they:

  1. Live in an area where there are no marketplace plans.
  2. Live in an area where there is just one insurer selling marketplace plans.
  3. Can’t find an affordable marketplace plan that doesn’t cover abortion.
  4. Experience “personal circumstances” that make it difficult for them to buy a marketplace plan, including not being able to find a plan in their area that gives them access to specialty care they need.

In California, two of those exemptions will be particularly relevant — the one related to abortion coverage and the one for people in counties where only one insurer sells through the state’s Affordable Care Act marketplace, Covered California.

The first new exemption, for people in areas with no marketplace plan, isn’t relevant for consumers anywhere in the United States this year. Since the Affordable Care Act’s marketplaces opened, there have been no “bare” counties.

However, in about half of U.S. counties — in which 26 percent of enrollees live — there is only one marketplace insurer this year, according to the Kaiser Family Foundation. (Kaiser Health News, which produces California Healthline, is an editorially independent program of the foundation.)

This includes California, where Anthem Blue Cross exited six counties and other communities this year, leaving an estimated 60,000 people with only one insurer.

The counties of Monterey, San Benito, San Luis Obispo, Santa Barbara, Inyo and Mono were left with only one insurance option: Blue Shield of California.

As for the abortion exemption, in many places it won’t be an issue either. Women in 31 states didn’t have access to a marketplace plan that covered abortion in 2016, according to a Kaiser Family Foundation analysis.

By California law, abortion services must be covered in marketplace plans as well as by Medi-Cal, the state’s Medicaid program, and by most private health plans outside of the marketplace — except employer-funded ones. That means women in the Golden State might have trouble finding insurance that excludes abortions, experts said. New York and Oregon also have similar laws.

The ACA established several different types of exemptions from the penalty for not having coverage. Among them are exemptions for not being able to find coverage that is considered affordable or being without insurance for less than three consecutive months in a year. People claim these more common exemptions when they file their tax returns.

Hardship exemptions that had already been on the books protected people who faced eviction, filed for bankruptcy or racked up medical debt, among other difficulties. Consumers apply for these exemptions by submitting an application to the ACA insurance marketplace.

The new hardship exemptions apply to people in all 50 states, according to an official at the federal Centers for Medicare & Medicaid Services, which oversees the health law’s insurance marketplaces. To apply, people generally need to provide a brief explanation of the circumstances that made it a hardship for them to buy a marketplace plan, along with any available documentation, when they submit their application to marketplace officials. They can apply for the current calendar year or going back two years, to 2016.

It’s difficult to gauge how many people will try to take advantage of the changes, said Tara Straw, a senior policy analyst at the Center on Budget and Policy Priorities.

“People aren’t sure how to apply or if they’re eligible, and that discourages them from applying,” Straw said.

The penalty for not having health insurance in 2018 is the greater of $695 or 2.5 percent of household income.

During the 2017 filing season, there were more than 106 million tax returns reporting that all family members had health insurance, and nearly 11 million tax returns that claimed an exemption from the requirement to have it, according to a report from the Treasury Department’s inspector general for tax administration. In addition, more than 4 million returns reported paying penalties totaling nearly $3 billion for not having health insurance.

People often don’t realize they may owe a penalty until it’s time to do their taxes, said Alison Flores, a principal tax research analyst at H&R Block’s Tax Institute. H&R tax preparers first work to see if clients can qualify for an exemption that can be claimed on their tax returns. If that doesn’t work, they move on to the hardship exemptions. The preparers help people get the hardship exemption application, but it’s up to consumers to send it to the marketplace and get the exemption certificate.

The federal guidance about the new exemptions was released April 9, shortly before the end of the income tax filing season. People who’ve already filed their taxes and qualify for the new exemptions for 2016 or 2017 and get marketplace approval can file an amended tax return to receive a refund of any penalty they paid, said Katie Keith, a health policy consultant who writes regularly about health reform.