The Tax Cuts and Jobs Act has lowered the amount of money that most Americans owe in taxes. Because of this, the IRS has changed the withholding tables to reflect the lower amount of taxes you anticipate owing.
Therefore, all things being equal, your withholding is based on this new table, and you will have less money withheld from your paycheck.
However, due to other changes in the tax law, you may find that your income taxes did not go down, leaving you owing money to the IRS when you file your return with a potential underpayment penalty.
The Underpayment Penalty
According to IRS.gov, "generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller."
Follow the steps below to find out if you are withholding enough from your paycheck to avoid this underpayment penalty.
Review Your Current Paystub & Update Your W-4
Keeping up to date with your life situation is very important in determining how much you should withhold on your W-4.
Your circumstances may have changed from what they were a year ago: you may have received a large raise, gotten a divorce, sold a house, etc. These kinds of circumstances can change how much you owe in taxes for the year.
The IRS withholding calculator is a good place to start to get a quick estimate on whether you are on track.
Review Your Itemized Deductions
If you have withheld less in previous years because you itemized your deductions, you will need to make sure you will itemize again in 2018.
The new tax law raised the standard deduction and eliminated many itemized deductions. If you are wrong about what you thought you would be able to deduct, you may get hit with a that underpayment penalty come tax time.
Review Your Exemptions & Credits
The new tax law also eliminates personal and dependent exemptions, which were valued at $4,050 per taxpayer, spouse, and dependent. That exemption previously prompted many to withhold less from their paycheck.
To help offset the elimination of those exemptions, the dependent tax credit was increased from $1,000 to $2,000.
Make sure you account for these changes to the law when you decide how much to withhold, and you may save yourself from owing money for 2018.
Have Your Accountant Run a Projection
The wisest thing you can do to avoid potential underpayment penalties and make sure you won’t owe money is to send your most recent paystub to your accountant.
They can do a projection to see if you need to withhold additional amounts to cover any shortfalls. Contact Glass Jacobson to perform this projection for 2018 so you are not blindsided next spring.
Our team will also be able to provide insight into other year end tax planning strategies in light of the new tax law.
What To Do If You Discover a Shortfall
If you discover that you owe a large amount to the IRS, you can:
- Increase withholdings for the remainder of the year
- Make a fourth quarter estimated federal or state tax payment to make up for the amount you should have previously been withholding
- If you are safe from underpayment of taxes based on last year’s tax liability or 90% of 2018 tax liabilities, you can pay the remaining liability by April 15, 2019.
WANT MORE POSTS LIKE THIS ON THE NEW TAX LAW
Enter your email below and we’ll keep you updated!
Did you enjoy this post? Please share it!
Recent Blog Posts
How to Use IRA Checkwriting in Retirement to Save on TaxesNovember 11, 2019
For more than four decades, the individual retirement account (IRA) has been the go-to savings vehicle for retirement savers who are looking for a current ...Read More
Everything you need to know about the Taxpayer First ActOctober 25, 2019
As of July 1, 2019, the Internal Revenue Service has been put on notice. The Taxpayer First Act has been passed by Congress with bipartisan ...Read More
IRMAA: The Hidden Medicare TaxOctober 24, 2019
IRMAA stands for Income-Related Monthly Adjustment Amount. Many of us pay premiums for Medicare Parts B and D just like any health insurance. But high ...Read More