About one in 5 taxpayers are predictedto have insufficient tax withholding for 2018 for income earned from an employer and/or self-employment. This could result in a nasty tax bill by the April tax filing deadline or, worse yet, under-withholding penalties. Fortunately, there is still time to take action to address this situation. Follow the steps below to review your 2018 income tax withholding and make estimates for 2019.
Write down your 2018 federal income tax withholding as listed on your final 2018 paycheck.
Add any estimated quarterly tax payments made for Q1, Q2, and Q3 of 2018.
Add together the total of tax payments to date from Step 1 and Step 2.
Complete an AAII 2018 Tax Forecasting Worksheet with actual or best estimate numbers (using 2017 figures as a reference point): https://www.aaii.com/files/pdf/TaxGuide2018/worksheet.pdf.
Compare the Total Tax figure on the AAII worksheet with your 2018 withholding and Q1-Q3 estimates.
If you are projected to owe money, make sure that you have paid (through employer tax withholding and/or timely quarterly estimated tax payments) either:
a) At least 90% of what you are projected to owe for 2018 or
b) 100% (110% with a prior year adjusted gross income above $150,000) of your prior tax year’s (2017) tax liability.
These two guidelines are known as the “safe harbor rules” to avoid having to pay an under-withholding penalty. The latter is generally the easiest to calculate because the prior year’s tax number is a known number vs. early income estimates for 2018 income taxes.
If you don’t meet either of the safe harbor rules and will owe more than $1,000 in 2018 because your 2018 income tax withholding was insufficient, download IRS Form 1040-ES at https://www.irs.gov/pub/irs-pdf/f1040es.pdf.
Calculate the difference between your withholding to date (Step 3) and the amount that should be withheld as per safe harbor b (see Step 6, above).
Review the 1040-ES form and print out Payment Voucher 4 for fourth quarter estimated taxes due January 15, 2019.
Return Payment Voucher 4 with the amount that needs to be paid as per Step 8. Make sure that your payment is postmarked by January 15, 2019 or it will be considered late and you may be charged a penalty.
Adjust 2019 tax withholding according to the data described above. For example, if your income tax withholding was $2,600 short in 2018 and you receive 26 bi-weekly paychecks, have $100 more withheld from each 2019 paycheck.
Double-check your 2019 income tax withholding estimates using the online IRS Withholding Calculator: https://www.irs.gov/individuals/irs-withholding-calculator.
A few closing thoughts:
¨ Remember, the calculation described above is just designed to avoid having to pay the penalty for underpaying your taxes. When a complete tax return is prepared for the April 2019 tax filing deadline, it is possible that you could owe more money once you have exact figures for dividends, capital gains, and other “unpredictable” income sources.
The federal underpayment penalty is calculated and assessed by the IRS quarterly
. The first quarter 2019
interest rate will increase to 6%. If taxpayers don’t meet the safe harbor figures described above, interest is charged on the unpaid balance of taxes due for each payment period until they are paid or until the April tax filing date, whichever is earlier.