Back in February of 2018, the IRS came out with new federal tax withholding tables for employers to use based on the new tax law. Although these tables were designed for the average taxpayer, there are scenarios where these tables may not work. In these cases, taxpayers may find out at April 15 that they thought that they were getting refunds because they had in the past, but they may not get any refunds, or may even owe. Click the orange circle below to listen to this episode.
WHO MAY GET CAUGHT BY THIS?
There are a number of situations that we found, and this is obviously not an inclusive list, but individuals that were paying high amounts of state and local taxes but were not in the alternative minimum tax may be affected by this because as we learned in previous episodes, the most you can deduct now for state and local taxes is $10,000. If someone was deducting $20,000-$30,000 in previous years, that is $10,000-$20,000 of additional income that is going to show up on their return that they probably weren’t expecting.
There are also people with three or more dependents that are over age 16, and they may be affected due to the fact that some of those exemptions went away.
Also, taxpayers with high business expenses and investment expenses, like the unreimbursed employee expenses that used to be itemized as miscellaneous deductions and now are not deductible. Those people will be affected by the new tax law. And also, just a normal couple that had about $24,000 in itemized deductions may be affected because they are going to lose those exemptions.
WHAT CAN A PERSON DO?
The IRS has really encouraged people to go onto their website and look at their withholding calculator and perform what they call a paycheck checkup. This calculator should give you a good idea on the correct allowances to take.
You could also talk to your tax preparer or CPA who can actually run a calculation for you. There is normally a little bit of a cost associated with this type of service depending on the complexity, but it would provide you with peace of mind.
WHAT SHOULD PEOPLE DO IF THEY NEED TO CHANGE THEIR WITHHOLDING?
What taxpayers should do at that point is file a new Form W-4 with their employer to change how much withholding comes off of their checks. One thing to remember with that is as it gets later and later into the year, you are only changing your withholding from this point to the end of the year. You may still have been short those first months of the year to now.
It was the intention of the legislators when they set up the new tax withholding tables to get the benefits from the tax reform bill to taxpayers as soon as possible. That is the reason why they made this change. Taking appropriate steps now can stop unexpected surprises later.