With the new federal tax law in effect as of 2018, you should review how much income tax you are having withheld from your paychecks in light of the changes. Withhold too much during the year, and your take-home pay will be lower than it should be…withhold too little, and you’ll face a tax bill later—plus possible interest and penalties for an underpayment.
The amount of tax your employer withholds depends on the number of personal allowances you claim on IRS Form W-4, “Employee’s Withholding Allowance Certificate.” Although the new law lowers federal income tax rates for many people and nearly doubles the standard deduction, it also eliminates personal exemptions and does away with or caps various federal deductions, causing taxes to go up for some taxpayers. It’s wise for any employee to revisit his/her amount withheld and/or estimated tax payments, but especially so if you have claimed more than two allowances in the past and especially if you fall into one of the following two groups…
If you itemized your deductions in the past, your taxes could go up in 2018. That may result from the fact that the new law caps federal deductions for state, local and property taxes at $10,000. The law also limits interest deductions on new mortgages to loan amounts up to $750,000 and erases some deductions, such as the deduction for moving expenses and for alimony payments resulting from decrees and agreements entered after 2018. With less in deductions available to reduce your taxable income, you may need to increase your withholding this year. But keep in mind that the law also nearly doubles the standard deduction. It may make sense for you to take the standard deduction and not itemize if the itemized deductions you can take this year total less than the now-larger standard deduction of $12,000 for individuals or $24,000 for married couples filing jointly.
Parents with Grown Dependents
The new tax law also eliminates personal exemptions, which were set amounts by which the IRS reduced taxable income for each person and dependent. For families with children under age 17, the loss of exemptions for their dependents may be offset by the fact that the law also doubles the child tax credit to $2,000 and raises the allowable income for claiming that credit.
What to do: The IRS has posted an updated online tool that helps you calculate how much you should withhold from your paychecks under the new tax law. This online withholding calculator allows you to input your financial information to estimate your 2018 tax liability. The tool is meant primarily for wage-earners, especially if there are two earners in the household, but it is possible to include non-wage income and so is useful for pension and Social Security recipients and self-employed taxpayers.
If you wait to calculate withholding until after you fill out your 2017 tax return, you can use that return as a guide to help determine the appropriate exemptions and itemized expenses (if any). And if you hire a tax preparer, consider asking him to run a projection of your anticipated 2018 income so you can implement the most accurate withholding rate possible.
If you determine that you have been underwithholding or overwithholding, you should fill out the new Form W-4 so that your employer can adjust the amounts withheld on your paychecks. You also may need to file estimated tax payments that adjust for the underpayments or overpayments up to this point in the year, using Form 1040-ES, “Estimated Tax for Individuals.”