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