Everyone is impacted by the 2017 Tax Reform: Tax Cuts and Jobs Act. As a result of the sweeping changes in the law and subsequent related adjustments to wage and income withholding tables, April may hold an unpleasant surprise in the form of additional tax due. Changes include increased standard deduction amounts, $10,000 limit to state and local itemized tax deductions, and eliminated personal exemptions. Additionally, child tax credits have increased, and there are dependent tax credits of $500 each, all subject to income phase-outs. Since the changes are dramatic, more so if your situation is complex, it’s imperative that you plan ahead so you can take action, now. The best way to determine your 2018 tax is with a detailed tax projection with your CPA. For the rest of us, the IRS has provided a nifty solution which is straight-forward, fairly comprehensive, and yet user-friendly in their new Withholding Calculator:
The calculator only takes about 10-15 minutes and requires your current year paystubs. It is helpful to have your 2017 tax returns to estimate other taxable income, such as interest/dividends, and any deductions, if you will itemize. Keep in mind miscellaneous itemized deductions, such as unreimbursed employee business deductions, investment, job search, union dues, etc., are no longer allowed.
Once complete, the withholding calculator presents you with a nice summary of your input amounts and the projected tax due when you file your 2018 taxes. When correlated with other tax projection software, the IRS withholding calculator was within $500 of tax projected. Interestingly, there is a discrepancy between what the site recommends as your increased (or reduced) withholding adjustment versus their calculated 2018 tax burden. As such, we advise you use the actual taxes computed to adjust your W-4 Form. See IRS Withholding Output Example
The sooner you use this tool, the more time you have to spread the necessary changes in withholding taxes over your remaining wages for a smaller per-period impact. If you do change your 2018 withholding, make a notation in your calendar to revisit the calculator in January of 2019 so that you can establish the full-year withholding adjustment. Revisit the calculator anytime your wages change or you receive a bonus. If married and both employed, you can fill out one calculator using the number of jobs feature to estimate increased or reduced withholding required per employer. Be certain to save this information, so that in the event your data was correct, but the online tool recommended too low of withholding and you become subject to estimated tax penalties, you have this resource to offer up as an argument to refute such penalty.
Article Written By:
Cynthia VerDuin, CPA