Estimated Tax Penalty
The tax filing season in 2019 was the first be impacted by the Tax Cuts and Jobs Act. As the filing season went on, many individual taxpayers were shocked to discover that the withholding they employed prior to the implementation of tax reform was wildly inadequate under the revised tax system. As a result, many taxpayers who formerly received large refunds found themselves with large tax bills when they filed.

So extreme was the underwithholding for 2018 that the IRS announced that it would only impose a penalty on individuals for underpayment of estimated tax if less than 80 percent of taxes were withheld during 2018 (normally, the penalty applies if less than 90 percent of taxes are withheld).

It is unlikely that the IRS will grant this kind of relief for 2019. Taxpayers still have time before the end of the year to adjust their withholding if they discover that they are still underwithholding. The IRS provides a calculator on its website to determine if enough taxes are being withheld.
COMMENT. Because the relief granted to taxpayers for their 2018 taxes may have simply resulted in taxpayers just paying their taxes due and moving on without adjusting for 2019, taxpayers could be in for a double surprise in 2020 if they have to pay the taxes due and a penalty.

Life Cycle Changes Important To Year-End Planning

While tax considerations are important, sometimes life gets in the way. Year-end tax strategies should also take into account personal circumstances that changed during 2019 as well as what may change in 2020. These “life cycle” changes include:

  • Change in filing status: marriage, divorce, death or head of household status
  • Birth of a child
  • Child too old for child credit
  • Child who has outgrown the “kiddie” tax
  • Casualty losses
  • Changes in medical expenses
  • Moving/relocation
  • College and other tuition expenses
  • Employment changes
  • Retirement
  • Personal bankruptcy
  • Large inheritance
  • Business success or failure