IRS has issued 2018 Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, and the instructions for the form. The new form and instructions provide procedures with respect to recently-announced estimated tax relief related to the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 2017) and also contain several minor TCJA-related changes.
Background—recently-announced estimated tax relief. Code Sec. 6654 imposes a penalty on an individual who underpays his or her estimated tax. Code Sec. 6654(d)(2) provides for a lower penalty where the “annualized income installment” is less than the amount otherwise determined to be the required estimated payment. Code Sec. 6654(e)(3)(A) gives IRS the power to waive the penalty where there are circumstances with respect to which the imposition of the penalty would be against equity and good conscience.
The TCJA was a comprehensive tax overhaul that dramatically changed the rules governing the taxation of individual taxpayers, providing new income tax rates and brackets, increasing the standard deduction, suspending personal deductions, etc. The legislation also provides a new deduction for non-corporate taxpayers with qualified business income from pass-throughs.
On Feb. 28, 2018, IRS released an updated Withholding Calculator and a new version of Form W-4 to help individual taxpayers determine their appropriate amount of 2018 tax withholding. Thereafter, IRS noted that, despite the release of the updated Withholding Calculator and new Form W-4, some individual taxpayers may have been unable to accurately calculate the amount of their required estimated income tax payments for 2018 and would be liable for a penalty.
On Jan. 16, 2019, pursuant to the authority in Code Sec. 6654(e)(3)(A), IRS announced, in Notice 2019-11, that the penalty for failure to make estimated income tax payments for the 2018 tax year is waived for any individual whose total withholding and estimated tax payments made on or before Jan. 15, 2019 equal or exceed 85% of the tax shown on that individuals return for the 2018 tax year. See IRS provides penalty relief for underpayment of 2018 estimated individual taxes.
Background—Form 2210. Historically, Part II of Form 2210 provides the five circumstances under which an individual taxpayer must file Form 2210. One such circumstance, listed in Box A of Part II of the form, applies where the taxpayer requests a waiver of his entire penalty. Where that is the case, the taxpayer is required to file page 1 of Form 2210 but is not required to figure a penalty.
Form 2210 procedures to take advantage of estimated tax relief. The instructions to Form 2210 instruct taxpayers as to how to take advantage of the Notice 2019-11 estimated tax relief: If line 9 of Part I of the form, “Required annual payment,” is greater than line 6 of Part I of the form, “Withholding taxes,” the taxpayer should complete the “85% Exception Worksheet” that is contained in the Form 2210 instructions, to see if he meets the conditions to be eligible to claim the waiver. If he meets those conditions, he must check Box A in Part II, write “85% Waiver” next to Box A, and file page 1 of Form 2210 with his return to request the waiver.
Observation: The penalty waiver creates a “cliff.” That is, if the 85% test is met, there is no penalty. If the 85% test is failed, even by as little as a dollar, the taxpayer is subject to the full amount of penalty that would otherwise apply.
Observation: The new penalty waiver doesn’t require that any estimated payments be made by the first three installment due dates for 2018. Thus, for example, a taxpayer who made no 2018 estimated payments during 2018 and had no withholding during 2018 avoids the estimated tax penalty if he paid 85% of his liability on Jan. 15, 2019.
Other changes to 2018 Form 2210. Form 2210, Schedule AI—Annualized Income Installment Method, contains changes that reflect the TCJA, including the elimination of the limit on certain itemized deductions by high income individuals, the elimination of personal exemptions, and the new deduction for qualified business income.