Newly-revised estimated tax form and publication can help people pay the right amount

Written on Apr 17, 2018

With tax reform bringing major changes for the year ahead, the IRS is reminding self-employed individuals, retirees, investors and others who need to pay their taxes quarterly that the first estimated tax payment for 2018 is due on Tuesday, April 17, 2018.

The Tax Cuts and Jobs Act, enacted in December 2017, changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding. Among other things, the new law changed the tax rates and brackets, revised business expense deductions, increased the standard deduction, removed personal exemptions, increased the child tax credit and limited or discontinued certain deductions. As a result, many taxpayers may need to raise or lower the amount of tax they pay each quarter through the estimated tax system.

The newly revised estimated tax package, Form 1040-ES, now available on IRS.gov, is designed to help taxpayers figure these payments correctly. Among other things, the package includes a quick rundown of key tax changes, income tax rate schedules for 2018 and a useful worksheet for figuring the right amount to pay. The IRS also mailed 1 million Form 1040-ES vouchers with instructions in late March to taxpayers who used the Form 1040-ES last year.

A companion publication, Publication 505: Tax Withholding and Estimated Tax, has additional details, including worksheets and examples, that can help taxpayers determine whether they should pay estimated tax, such as those who have dividend or capital gain income, owe alternative minimum tax or have other special situations.

Who needs to pay quarterly?
Most often, self-employed people, including some persons involved in the sharing economy, need to pay quarterly installments of estimated tax. Similarly, investors, retirees and others - a substantial portion of whose income is not subject to withholding - often need to make these payments as well. Besides self-employment income, other income generally not subject to withholding includes interest, dividends, capital gains, alimony and rental income.

Because the U.S. tax system operates on a pay-as-you-go basis, taxpayers are required by law to pay most of their tax liability during the year. For 2018, this means that an estimated tax penalty will normally apply to anyone who pays too little tax, usually less than 90%, during the year through withholding, estimated tax payments or a combination of the two. Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishermen, casualty and disaster victims, those who recently became disabled, recent retirees, and those who receive income unevenly during the year. In addition, there is an exception to the penalty for those who base their payments of estimated tax on last year’s tax. Generally, taxpayers will not have an estimated tax penalty if they make payments equal to the lesser of 90% of the tax to be shown on their 2018 return or 100% of the tax shown on their 2017 return (110% if their income was more than $150,000). See Form 2210 and its instructions for more information.

Employees have a choice. Many employees who also receive income from other sources may be able to forgo making estimated tax payments and instead increase the amount of income tax withheld from their pay. They can do this by claiming fewer withholding allowances on their Form W-4 by completing the Deductions, Adjustments, and Additional Income Worksheet in the instructions to Form W-4. If that’s not enough, they can ask their employer to withhold an additional flat-dollar amount each pay period on the Form W-4. Because of the far-reaching tax changes taking effect this year, the IRS urges all employees, including those with other sources of income, to perform a paycheck checkup now.

Doing so now will help avoid an unexpected year-end tax bill and possibly a penalty. The easiest way to do that is to use the newly-revised Withholding Calculator, available on IRS.gov. However, employees who expect to receive long term capital gains or qualified dividends, or employees who owe self-employment tax, alternative minimum tax, or tax on unearned income of minors should use the instructions in Publication 505 to check whether they should change their withholding or pay estimated tax. To use the Withholding Calculator most effectively, be sure to have on hand a copy of last year’s tax return, along with the most recent pay stub. After filling out the Withholding Calculator, the tool will recommend the number of allowances the employee should claim on their Form W-4.

Though primarily designed for employees who receive wages, the Withholding Calculator also can be helpful to some recipients of pension and annuity income. If the Withholding Calculator suggests a change, the employee should fill out a new Form W-4 and give it to their employer. Similarly, recipients of pensions and annuities can make a change by filling out Form W-4P and giving it to their payer.

How and when to pay 
For tax-year 2018, estimated tax payment due dates are April 17, June 15, Sept. 17 and Jan. 15, 2019. Taxpayers due a refund on their 2017 federal income tax return may be able to reduce or even skip one or more of these payments by choosing to apply their 2017 refund to their 2018 estimated tax. See Form 1040 and its instructions for more information. Taxpayers in presidentially-declared disaster areas may have more time to make these payments without penalty.

Visit the Tax Relief in Disaster Situations page for details. The fastest and easiest way to make estimated tax payments is to do so electronically using IRS Direct Pay or the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). For information on other payment options, visit IRS.gov/payments. For those who choose to pay by check, the check must be payable to the United States Treasury. More information about tax withholding and estimated tax can be found on the agency’s Pay As You Go web page, as well as in Publication 505, Tax Withholding and Estimated Tax.

Inflation adjustments under recently enacted tax law
The IRS has updated the tax year 2018 annual inflation adjustments to reflect changes from the Tax Cuts and Jobs Act (TCJA). The tax year 2018 adjustments are generally used on tax returns filed in 2019.

The tax items affected by TCJA for tax year 2018 of greatest interest to most taxpayers include the following dollar amounts.

  • The standard deduction for married filing jointly rises to $24,000. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,000; for heads of households, $18,000.
  • The TCJA reduced the personal exemption. The personal exemption for tax year 2018 is $0.
  • TCJA reduced tax rates for many taxpayers. The new tax rates are: 10%, 12%, 22%, 24%, 32%, 35% and a top rate of 37%. For tax year 2018, the highest tax rate will apply to married individuals filing jointly and surviving spouses with taxable incomes over $600,000, to single taxpayers and heads of households with incomes over $500,000, and to married taxpayers filing separately with incomes over $300,000.
  • The TCJA eliminates the limitation for itemized deductions.
  • The Alternative Minimum Tax exemption amount for tax year 2018 is greatly increased under TCJA. For tax year 2018, the exemption amount for single taxpayers is $70,300 and begins to phase out at $500,000, and the exemption amount for married couples filing jointly is $109,400 and begins to phase out at $1 million.
  • For estates of any decedent passing away in calendar year 2018, the basic exclusion amount is $11,180,000.

Certain items had minor adjustments. TCJA requires a different method for adjusting for inflation.

  • For 2018, the foreign earned income exclusion will be $103,900.
  • The maximum earned income credit amount will be $6,431 for taxpayers with 3 or more qualifying children, for 2018. Other earned income credit amounts are detailed in Revenue Procedure 2018-18.
  • For tax year 2018, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,300, but not more than $3,450. For self-only coverage, the maximum out-of-pocket expense amount is $4,550. For tax year 2018, the floor for the annual deductible for participants with family coverage is $4,550; however, the deductible cannot be more than $6,850. For family coverage, the out-of-pocket expense limit is $8,400 for tax year 2018. (Only the “$4,550” amount differs from what was in the IR-2017-178.)

Items unaffected by the TCJA 
The dollar amounts for the following items described in the inflation adjustment news release issued in Oct. 2017 remain unchanged under the new method for adjusting for inflation required by the TCJA.

  • For tax year 2018, the annual exclusion for gifts is $15,000.
  • For tax year 2018, the monthly limitation for the qualified transportation fringe benefit is $260, as is the monthly limitation for qualified parking.
  • For tax year 2018, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $114,000.
  • For calendar year 2018, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage is $695. Revenue Procedure 2018-18 provides greater detail on these and other inflation adjusted items affected by the recently enacted tax law. See also Revenue Procedure 2018-22.

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