Tax Reform Will Make You Double Check Your Withholdings

Collecting money every tax season has got to be one of the best moments in a taxpayer’s life. A lot of workers calculate their withholdings to ensure they’re getting their money back at tax time. Paying taxes is kind of like a great way to save money especially because most people don’t really trust themselves when it comes to saving. Once the tax refunds arrive, people pay off their debt and of course, take a vacation to their dream destination.

However, your clients must start reviewing their income tax withholding and if applicable, make adjustments. The new Tax Cuts and Jobs Act (TCJA) recently lowered tax rates for individuals started 2018 through 2025. This means employers must already think they are over-withholding if their W-4s weren’t updated yet.

The only problem is that due to the combination of various key provisions included in the new tax law, it can get complicated for some clients as they may learn that they are actually under-withholding.

Employers usually meet their annual tax obligations by having enough tax withheld from their paychecks within the year. But failing to pay enough tax such as the withholding and making quarterly installments can cause the IRS to impose underpayment penalties except when a tax law exemption is applicable.

The new law contains several provisions affecting withholding aside from the reduction in tax rates for taxpayers which the IRS has already addressed in revised withholding tables issued earlier this year. Here are the following things you need to consider:

• Standard Deduction. Some taxpayers use standard deduction instead of itemizing but it doubles into $12, 000 for single filers and for joint filers, $24,000.
• Personal Exemptions. They have eliminated including personal exemptions previously allowed for dependents like your children and other eligible relatives.
• Child Tax Credit. Under the new law, the child tax credit is now doubled to $2,000 with a $1,400 refundable amount. A nonrefundable $500 credit for non-children dependents has also been created by the TCJA.
• State and Local Taxes (SALT) Deduction Cap. This deduction is now limited to $10,000 per year applicable to any combination of state and local property taxes and state and local income taxes or sales taxes. Prior to the new law, SALT payments were fully deductible by itemizers.
• Mortgage Interest Deduction. Some taxpayers have to face a reduced mortgage interest deduction under the new law. If you have a newly acquired debt, your deduction is now limited to interest paid on the first $750,000 of debt, down from $1 million. On the other hand, the deduction for interest paid on home equity debt which has been limited to interest paid on the first $100, 000 of debt, was generally repealed.
• Miscellaneous Expenses Deduction. This deduction is eliminated including tax and investment advisory fees and unreimbursed employee business expenses.

The new law made changes affecting taxpayers who were used to itemized their deduction for years or even decades as they will have to file their return using standard deduction this year. This could cause a need to level up withholding. Picture out a high-state taxpayer living in California or New York who have been claiming large deductions for SALT payments. The new law will make the taxpayer realize that to itemize their deductions benefits them more and not the standard deduction as it doesn’t affect any of the payments at all.

On the contrary, the higher standard deduction and CTC may more than offset the repealing of personal exemptions for some individuals. In this case, they may be advised to lower down their withholding.

Conversely, for some taxpayers, the higher standard deduction and CTC may more than offset the elimination of personal exemptions. These individuals may be advised to decrease their withholding.

It may be best for you to use the IRS online calculator found in their website and double check your withholding. The process can be quite difficult because you will need to find out the optimal withholding adjustments, to collect all the pertinent information like your current salary, and all the information from last year’s return. Asking for a tax professional's help may not be a bad idea too for a more accurate calculation and checking.