By: Maxine Riddle, MBA, CPA
Individual taxpayers may be caught off guard when filing their tax returns for 2018 due to the Tax Cuts and Jobs Act and changes made to the withholding tables promulgated the Internal Revenue Service (IRS).
In a report issued this summer by the General Accountability Office (GAO), it is estimated that 21% of taxpayers will owe more taxes, a 3% increase over the prior year. And while this percentage increase appears small, it still represents millions of U.S. taxpayers. Another large group of taxpayers may find their expected refund reduced as compared to prior years.
The amount of federal income tax withheld from your paycheck is based upon the information you submitted to your employer on Form W-4, Employee’s Withholding Allowance Certificate. Based upon the revised withholding tables released by the IRS for implementation in February, most taxpayers saw a decrease in their federal withholding and an increase in their take-home pay. But large questions remain: Did your actual individual income tax liability under the new tax act also decrease in correlation to the decrease in your withholding? Did you revise your Form W-4 in 2018 to reflect how the new tax law changes affect your personal liability? If you are unsure of where you stand, you may need to take a closer look – and soon!
Let’s take a look at who is most likely to owe or receive a reduced refund. While this list is not all-inclusive, and the tax law changes are too numerous to describe in this article, taxpayers with the following circumstances should certainly take a closer look at their personal taxes for 2018.
- Taxpayers with older dependents (usually age 17 or older)
- Taxpayers in two-income families or with multiple employers
- Higher-income households and/or those with complex returns
- Generally, taxpayers who claimed itemized deductions in 2017
- Taxpayers with specific itemized deductions including:
- Significant business expenses
- Deductible investment fees
- High state income taxes from living in a state with high tax rates
In addition, taxpayers with a shortfall in their withholding could also be facing an IRS penalty for underpayment of estimated taxes. To avoid the assessment of this penalty, taxpayers must pay in the lesser of 90% of their tax liability for the current year (2018), or 100% or their 2017 liability (110% for higher-income taxpayers).
What can be done?
- The IRS has a number of resources available to assist taxpayers including a Withholding Calculator, Form 1040-ES and instructions, Publication 505, and FAQs on Estimated Taxes for Individuals. Check out the IRS website at irs.gov/newsroom/individuals.
- Individuals may need to prepare and submit a new Form W-4 to their employer to increase their withholding for the remainder of 2018 and for 2019, if necessary.
- Estimated payments may also be made to make up any shortfall and avoid or reduce any underpayment penalty.
- Employers can remind employees to check their withholding in relation to their potential tax liability 2018.
If you need assistance or have any questions, please contact one of our tax managers at 412-257-5980.