By Sheila Foley, Accounting Consultant
The Tax Cuts and Jobs Act was enacted in late December, 2017 and it significantly altered the tax laws applicable to individual taxpayers. The significant changes included: reduction in tax rates and modification of brackets, increase in the standard deduction, repeal of personal exemptions, limitation on deductions for state and local taxes, mortgage interest, home equity loan interest and elimination of deduction for miscellaneous itemized deductions.
In January, 2018 in response to these changes, the IRS released new tax withholding tables to be used by employers to calculate wage withholdings. The IRS announced that employees do not need to complete and employers are not required to request new wage withholding forms (Form W-4) as a result of the changes made by the tax act.
In February, 2018 the IRS announced the availability of its Withholding Calculator and encouraged taxpayers to re-evaluate their paycheck withholding by performing a “paycheck checkup”. The IRS was sending employees a confusing message indicating “no action was required” after the passage of the tax act but “strongly encouraging” employees to use the withholding calculator. Using the calculator can help protect against having too little tax withheld and facing an unexpected tax bill at tax time next year.
The withholding calculator helps determine whether a taxpayer needs to give their employer a new Form W-4. The results from the Calculator can help taxpayers fill out the form and adjust their income tax withholding for the remainder of 2018.
Taxpayers most likely to be impacted by the tax law changes and have incorrect withholdings include: taxpayers with two jobs, two income families, taxpayers that itemized deductions in 2017, and taxpayers with dependents over the age of 17.
The IRS noted that the Withholding Calculator works for “most taxpayers”. People with more complex tax situations should use the instructions in Publication 505, Tax Withholding and Estimated Tax. This includes taxpayers who owe self-employment tax, alternative minimum tax, the tax on unearned income of dependents, or have long-term capital gains or qualified dividends.1
In July, 2018, the Government Accountability Office released a report https://www.gao.gov/assets/700/693582.pdf indicating that approximately 21% of all taxpayers will not have sufficient taxes withheld from their wages in 2018.
In June, 2018, the IRS released a draft of the 2019 Form W-4. Employees will need to complete this form to properly determine their 2019 wage withholdings. The draft form eliminates the concept of withholding allowances and instead directly asks for taxable income amounts. Continuing to send taxpayers a confusing message, the instructions to the draft form indicate that employees can continue to use the W-4 information filed in 2017 or 2018 and filing a new form for 2019 is not required.
We suggest taxpayers use the online calculator or contact their tax preparer to determine if their 2018 withholdings will be sufficient in light of the many changes made by the Tax Cuts and Jobs Act. Adjusting withholding for the remainder of the year can avoid an unpleasant surprise at tax filing time. If you have additional questions, please contact us here at ASL.