IRS Encourages Taxpayers to Check Withholding

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 exact amount of your previous tax liability.

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 In addition, the deduction for interest paid on up to $100,000 of home equity debt is generally repealed (unless the home equity debt is used to buy, build or substantially improve the home secured by the debt, in which case it can be treated as acquisition debt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.