Millions of Americans were surprised by their 2018 personal income tax results. Some owed less than in previous years, while others received a smaller refund. 2018 was the first year that the Tax Cuts and Jobs Act took full effect, so all taxpayers were affected to some degree.
While a large refund is easier to handle than a large amount due, both require careful consideration of a taxpayer’s current withholding levels.While some individuals enjoy a large refund, this also means that the government held onto your money throughout the year, when you could have enjoyed increased cash flow and put the money to work, versus providing the federal or state government with an interest-free loan.
A large amount owed could result in underpayment of estimated tax penalties if certain safe-harbor requirements are not met.That said, as we are only a third of the way through a new year, now is a great time to evaluate your current withholding and estimated tax levels, and see if an adjustment one way or another is needed.
The TCJA and withholding
To reflect changes under the Tax Cuts and Jobs Act (TCJA) — such as the increase in the standard deduction, elimination of personal exemptions and changes in tax rates and marginal brackets — the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks, generally reducing the amount withheld.
The new tables may provide the correct amount of tax withholding for individuals with simple tax situations, but they might cause other taxpayers not to have enough withheld to pay their ultimate tax liability, especially those with other sources of income besides wages. In that case, careful attention must be paid to one’s overall projected tax liability, and associated withholding or estimated income tax levels.
Perils of the new tables
The IRS itself cautions that people with more complex tax situations face the possibility of having their income taxes under-withheld. If, for example, you itemize deductions, have dependents age 17 or older, are in a two-income household or have more than one job, you should review your tax situation and adjust your withholding if appropriate.
The IRS has updated its withholding calculator to assist taxpayers in reviewing their situations. The calculator reflects changes in available itemized deductions, the increased child tax credit, the new dependent credit and repeal of dependent exemptions.
Learn more about the IRS resources in our article, IRS Encourages ‘Paycheck Checkup’ for Taxpayers to Check Their Withholding.
Tax law changes aren’t the only reason to check your withholding. Additional reviews during the year are a good idea if:
- You get married or divorced,
- You add or lose a dependent,
- You purchase a home,
- You start or lose a job, or
- Your investment income changes significantly.
You can modify your withholding at any time during the year, or even multiple times within a year. To do so, simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly payments are due.)
The TCJA and your tax situation
If you rely solely on the new withholding tables, you could run the risk of having your federal income taxes under-withheld. As a result, you might face an unexpectedly high tax bill when you file your tax return next year or even have an underpayment of estimated tax penalty due on top of the taxes owed. Contact us for help with determining whether you should adjust your withholding. We can also answer any questions you have about how the TCJA may affect your particular situation.