Under certain circumstances the estimated tax penalty is waived for taxpayers whose 2018 Federal income tax withholding and estimated tax payments fell short of their total tax liability for the year that under certain circumstances.

In principle, a penalty applies at tax filing if too little is paid during the year. However, the penalty would not apply for 2018 if tax payments during the year met one of the following tests:

• The individual’s tax payments were at least 90% of the tax liability for 2018; or
• The individual’s tax payments were at least 100% of prior year’s tax liability, in this case from 2017. However, the 100% threshold is increased to 110% if a taxpayer’s adjusted gross income is more than $150,000, or $75,000 if married and filing a separate return. 

Last week, the IRS announced that the 90% threshold is lowered to 85%. This means that a taxpayer will not owe a penalty if they paid at least 85% of their total 2018 tax liability. If the taxpayer paid less than 85%, then they are not eligible for the waiver and the penalty will be calculated as it normally would be, using the 90% threshold.