Are you having enough money withheld from your regular paychecks? The Tax Cuts and Jobs Act (TCJA) has made several significant changes to the tax rules for individuals for 2018 through 2025. As a result, many taxpayers who previously itemized deductions are expected to claim the standard deduction, starting in 2018.

3 Families Who Might Need to Adjust Their Withholding

What sort of situations might require a change in withholding? Computing the right amount to withhold can be complicated. Although there are numerous factors that affect your decision, here are three examples of scenarios that might require a change in withholding for 2018.

The Miller Family

The Millers are a married couple who file jointly. They live in a state with high income and property tax rates. Last year, they claimed more than $35,000 in state and local income and property taxes.

Under the Tax Cuts and Jobs Act (TCJA), the Millers' 2018 itemized deduction for state and local taxes will be limited to only $10,000. Depending on their other deductions, they might decide to claim the standard deduction of $24,000 instead. So, it's a good idea for the Millers to re-evaluate their withholding for 2018.

The Patel Family

The Patels are a newly married couple who bought a home in an expensive area in March. With the new acquisition debt of $1 million, their mortgage interest payments are expected to be around $7,000 a month, or $70,000 for 2018.

The Patels expect to itemize deductions, but interest on only $750,000 of acquisition debt will be deductible under the TCJA. This couple should assess their withholding to determine whether they need to set aside more or less in 2018 to cover their estimated tax obligation.

The Smith Family

The Smiths are a married couple who file jointly. They have four dependent children, including twins who will turn 17 in November. The other two children are younger. In the past, this family itemized deductions. But, under the TCJA, their expected itemized deductions will total only $20,000. So, they expect to take the $24,000 standard deduction.

In addition, the Smiths will lose out on the tax benefit of six personal exemptions — but two of their children will qualify for a $2,000 child tax credit. Their twins will each qualify for a $500 tax credit, but they won't qualify for any higher education tax credits until they go to college in 2019. The Smiths may need to revise their withholding in 2018 and then again when the twins go off to college.

How is withholding affected by the TCJA? The amount you elected to have withheld on your Form W-4 under the previous tax law might need to be revised under the new law. If you withhold too much, you're effectively giving the IRS an interest-free loan to use your money until it's refunded after you file your 2018 return sometime next year. Conversely, if you withhold too little, you'll face a stiffer tax bill when you file the return.

Unfortunately, it's not easy to figure out the right withholding amount under the TCJA. A "paycheck checkup" can help you assess your situation.

Withholding Basics

Your 2018 tax return isn't due until next April. But you generally can't wait until you file your tax return to pay the full amount of tax you owe. Instead, employers are required to withhold taxes from the paychecks of employees. Likewise, self-employed individuals and retirees and others with investment income or retirement account withdrawals must make quarterly estimated payments.

You might need to do both — have tax withheld and pay quarterly installments — if you earn substantial income outside of your regular salary. If you fail to comply with the requirements, you could be liable for an estimated tax underpayment penalty, in addition to the tax liability.

The due dates for the quarterly estimated payments for a tax year are:

  • April 15,

  • June 15,

  • September 15, and

  • January 15 of the following year.

These dates are adjusted for weekends and holidays. So, the next quarterly installment for income earned in 2018 is due Monday, September 17, 2018.

Safe Harbors

You can avoid an estimated tax underpayment penalty using any one of these three safe harbor rules:

1. You pay at least 90% of the current year's tax liability. This requires you to make a calculated guess of your current tax situation.

2. You pay at least 100% of the prior year's tax liability. (Or you pay at least 110% of the prior year's tax liability if your adjusted gross income for the prior year exceeded $150,000.) This safe harbor is usually the easiest one to use because you know the exact amount of your previous tax liability.

3. You pay at least 90% of the current year's "annualized income." The annualization method often works well for certain individuals, such as independent contractors, who receive most of their income on a seasonal basis.

Despite these safe harbor rules, the IRS encourages taxpayers to use withholding (if possible) to navigate their way around potential penalties.

TCJA Changes

If you've been having "just the right amount" withheld for your circumstances in the past, the TCJA has altered the landscape. Examples of major changes that will affect individuals for 2018 through 2025 include the following:

  • The standard deduction is almost doubled to $12,000 for single filers, $24,000 for joint filers, and $18,000 for heads of households.

  • The itemized deduction for state and local taxes combined is limited to $10,000 per year. This applies to any combination of 1) state and local property tax and 2) state and local income tax (or state and local general sales taxes if you choose to deduct them instead of state and local income taxes). Previously, these amounts were fully deductible by most taxpayers who itemized deductions.

  • The itemized deduction for mortgage interest is potentially reduced under the new law. Specifically, the interest deduction for new acquisition debt is limited to interest paid on the first $750,000 of debt, down from $1 million. (Pre-TCJA home acquisition debts of up to $1 million are grandfathered under prior law.) In addition, the deduction for interest paid on up to $100,000 of home equity debt is generally repealed (unless the home equity debt is used to buy, build or substantially improve the home secured by the debt, in which case it can be treated as acquisition debt subject to the $750,000 limit).

  • Itemized deductions for most miscellaneous expenses — such as investment advisory fees and unreimbursed employee business expenses — are eliminated.

  • Personal and dependent exemptions are eliminated.

  • The child tax credit — which generally applies to dependent children under age 17 — has been increased from $1,000 to $2,000, and the income phaseout thresholds have been significantly increased (to $200,000 for singles and heads of households and $400,000 for married couples who file jointly). So, many more households will be eligible for the increased credit. In addition, a new $500 credit is available for other qualified dependents, including a qualifying 17- or 18-year-old, a full-time student under age 24, a disabled child of any age, and other qualifying (nonchild) relatives if all the requirements are met.

In light of these changes, many taxpayers who have itemized in the past may instead opt for the standard deduction starting in 2018. This could have a major impact on their withholding obligations.

Even if you expect to continue to itemize under the TCJA, you can benefit from a "paycheck check-up," especially if you have older children who won't qualify for the $2,000 child tax credit or you report income from more than one job. (See "3 Families Who Might Need to Adjust Their Withholding" at right.)

Of course, your withholding choices should also reflect your personal preferences. For instance, some taxpayers prefer to overpay taxes during the year so they can receive a big tax refund from Uncle Sam. Others like to just break even.

To adjust your withholding, request a new W-4 form from your employer, fill it out and then submit it. Any withholding change will show up in the next payroll calculation.

Need Help?

The IRS offers worksheets for estimating the "right" amount of withholding, as well as a new online withholding calculator to help you crunch the numbers. Unfortunately, the online calculator requires you to input a lot of financial information, which can be time consuming. And many people aren't comfortable putting sensitive personal data into cyberspace.

To minimize the hassle and potential security risks, discuss your withholding with your tax advisor. He or she can help you sort through the provisions of the TCJA that will affect your tax situation and address other withholding objectives in the coming years.


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