Does Your Paycheck Need A Checkup?

By:  Shana M. MacDonald

The IRS estimates that 21% of taxpayers will be under-withheld due to the new withholding tables that went into effect this year. This may lead to a higher than expected balance due on your 2018 federal income tax return and possibly an underpayment penalty as well.

To address this, the IRS is encouraging taxpayers to do a “paycheck checkup” to reassess their 2018 withholding. In doing so, taxpayers will need to take into account the sweeping changes imposed by the Tax Cuts and Jobs Act (TCJA). Some of the key changes that you will need to consider in evaluating your withholding include: 1 reduced income tax rates along with expanded tax brackets; 2 near doubling of the standard deduction; 3 elimination of personal and dependent exemptions; 4 increased child tax credit; and 5 numerous limitations and repeals enacted on itemized deductions.

The new withholding tables released by the IRS in January of this year are intended to reflect the changes from TCJA and produce approximate withholding amounts for those with simple tax situations, generally reducing the amount withheld from employees’ paychecks. However, this lower withholding combined with the loss of many itemized deductions could leave some taxpayers significantly under-withheld on their federal income taxes – particularly those with high income or more complex tax situations. For this reason, we recommend that you review your personal situation (and your pay stub) to avoid a surprise tax bill and the dreaded penalties and interest that could come with it.

To aid in this process, there is a free withholding calculator available on the IRS website which can help you determine whether changes to your federal withholding are necessary. Individuals with more complicated tax situations would be wise to also consult with their tax professional to discuss the specific implications of TCJA on their personal tax return.

Whether you decide to do it yourself or seek the advice of a professional, it is imperative that you perform this check-up sooner rather than later because the longer you wait, the fewer pay periods there will be to apply the change and the more impact it will have on your paycheck. Taxpayers who find that their withholding does, in fact, require an adjustment will need to submit a new Form W-4 to their employer as soon as possible.

If you have any questions regarding tax reform, tax withholding, or tax planning, please contact our office as we will gladly assist you in understanding the effects of TCJA and how to navigate our ever-changing tax landscape.