In response to the Tax Cuts and Jobs Act, the IRS has updated its withholding tables, which may have significant implications on your tax return. In light of these recent tax changes, now is the right time to revisit your federal tax withholding. Kris Giannetti, CPA, gives her thoughts on how to navigate these new tax realities.
To address the major changes enacted by the new tax law, the IRS made large adjustments to its tax withholdings tables. In the short-term, this may feel like a win for many individual taxpayers. This is because these adjustments are causing an increase in their take-home pay. However, this influx of cash might come at the expense of an unexpected tax liability.
The other side of the equation is receiving a large refund at tax time. While that may seem like a good thing, in reality, over-withholding is akin to providing the government with an interest-free loan.
A common misconception that I run across is the notion that once withholding declarations are made, they’re set in stone. This is not the case at all. Employees can file a new W-4 form with their employer to update their withholdings at any time.
The general approach I suggest to most clients is to owe only a small amount at tax time. The goal is to limit a large tax liability, while at the same time, avoiding withholding too much tax throughout the year. Even though we’re already in June, it’s still not too late to make changes that will help you at tax time. For instance, if you were under or over withheld in the first half of the year, it’s possible to make adjustments to get your withholding in line with your expected tax liability. It’s really about finding the right balance.
That’s where 415 Group provides real value for our clients. On top of working with you to make the proper withholding adjustments, we provide accurate tax projections based on your specific tax situation. By looking at your position as a whole, we’re able to understand your needs and deliver the most tax advantageous results.
If you received a large refund after filing your 2017 income tax return, you’re probably enjoying the influx of cash. But a large refund isn’t all positive. It also means you were essentially giving the government an interest-free loan.
That’s why a large refund for the previous tax year would usually indicate that you should consider reducing the amounts you’re having withheld (and/or what estimated tax payments you’re making) for the current year. But 2018 is a little different.
The TCJA and withholding
To reflect changes under the Tax Cuts and Jobs Act (TCJA) — such as the increase in the standard deduction, suspension of personal exemptions and changes in tax rates and 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 to not have enough withheld to pay their ultimate tax liabilities under the TCJA. So even if you received a large refund this year, you could end up owing a significant amount of tax when you file your 2018 return next year.
Perils of the new tables
The IRS itself cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld. 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 (available at irs.gov) 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.
Tax law changes aren’t the only reason to check your withholding. Additional reviews during the year are a good idea if:
You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you 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 significantly underwithholding your federal income taxes. As a result, you might face an unexpectedly high tax bill when you file your 2018 tax return next year. Contact us for help determining whether you should adjust your withholding. We can also answer any questions you have about how the TCJA may affect your particular situation.