As of this column, George Jones has officially retired from writing the Tax Strategy column after 21 years of thoughtful analysis and insight. I will miss his topic ideas, writing skills and second set of eyes. He always strived to make the column include practical advice that tax practitioners could put to use. (See George's parting note below.)
Tax practitioners generally advise clients every year to check the tax withholding from their paychecks. Even if the tax laws had not undergone significant changes in the last year, it is a good idea to consider changes in marital status, number of children, changes in income not subject to withholding, taking on a second job, and the amount owed or refund received on the prior year’s tax return.
However, in 2018, with significant changes in many aspects of federal tax law, it is a particularly good idea to get clients to verify that their withholding is as accurate as possible.
The IRS has stated that, as of July 20, 2017, more than 106 million tax refunds had been sent out of the 142 million total individual tax returns processed, with an average refund well over $2,700. Many people like to get tax refunds. It provides a cushion so that they do not risk underpaying by too much and face an underpayment of estimated tax penalty. Even though it represents an interest-free loan to the government for the year, some people probably feel the government might be able to better save money for them than they can, and like being forced to put money into a savings account during the year that pays no interest.
Still, having a larger paycheck can be very helpful also, and most taxpayers are probably overdoing it a bit with the size of their refund. Also, as refunds have been delayed due to statutory requirements for those claiming the Earned Income Tax Credit and the Additional Child Tax Credit, as well as IRS procedural delays to strengthen protections against identity theft, that interest-free loan to the government may now be for an even longer period.
Major changes in the tax law that could impact withholding include the reduction in individual tax rates, the increase in the standard deduction, the elimination of personal exemptions, the increase in the child tax credit, and the adjustment, both up and down, to a number of itemized deductions. The IRS issued revised 2018 withholding tables to try to reflect these changes. The IRS also tried to keep the structure of the withholding tables and Form W-4 as similar as possible to prior years to assist payroll processors in implementing the changes. For example, the tables still tie the withholding allowance to the projected personal exemption amount for 2018, even though the Tax Cuts and Jobs Act eliminated the personal exemption starting in 2018.
Self-employed taxpayers, including participants in the gig economy, who also work as employees, can choose to make quarterly estimated tax payments or increase their employer withholding in an amount equal to what would have been paid as estimated taxes, including self-employment taxes. Withholding also has the advantage over estimated taxes of being assumed to be paid equally throughout the year even if, in fact, it was back-loaded toward the end of the year.
THE 2018 WITHHOLDING TABLES
The timing of the Tax Cuts and Jobs Act has also meant that the revised withholding tables were late and employers were not able to implement the new withholding with the first pay period in 2018. The IRS gave employers until March pay periods to implement the new tables. However, many employees will have had two months of withholding at the old 2017 rates for January and February of 2018, making many employees already likely to be over-withheld for the year.
Employees will not get a good sense of what their 2018 withholding will look like until they can check their March paystubs after the new withholding tables have been implemented. At that point employees should have the information that they need to consider updating their W-4 form.
THE NEW W-4 FORM
The revised Form W-4, issued at the end of February 2018, is similar in format to the prior W-4. The Withholding Allowance Certificate is basically unchanged. The Personal Allowances Worksheet has been significantly revised to reflect changes in the new tax law. It also permits adjustments for additional credits from Worksheet 1-6 in Publication 505, which had previously been a different worksheet in Publication 505 reflected on the Deductions and Adjustments Worksheet. The Deductions and Adjustments Worksheet has been retitled as the Deductions, Adjustments, and Additional Income Worksheet, but the change in title reflects information that had already been included in the prior worksheet.
The Two-Earners/Multiple Jobs Worksheet also retains basically its same format. The 2018 Form W-4 does include a greatly expanded set of instructions, which also incorporate references to use of the W-4 calculator to address more complicated situations or to check to see if the taxpayer’s revised W-4 achieved the effect on their paycheck that they were expecting.
THE W-4 CALCULATOR
The IRS website also includes the W-4 calculator at www.irs.gov/W4App. The calculator is designed to address additional situations such as a working spouse, more than one job, or a large amount of non-wage income. Use of the calculator will avoid the need to complete the worksheets with Form W-4 and permit inserting information directly into the Withholding Allowance Certificate.
The calculator asks the taxpayer to estimate their 2018 sources of income, the number of children they will claim for the Child Tax Credit and Earned Income Tax Credit, and similar items. The IRS suggests that, while using the calculator, the taxpayer have at hand the most recent pay stubs and the most recent income tax return. The IRS also suggests taxpayers with even more complicated issues such as owing self-employment tax, the Alternative Minimum Tax, the Kiddie Tax, and long-term capital gains should go even deeper and consult the discussions in Publication 505.
The IRS also suggests coming back to the calculator during the year as circumstances change to monitor the accuracy of the withholding.
It will be even more important than usual this year to have taxpayers monitor the accuracy of their withholding. With the many changes resulting from the Tax Cuts and Jobs Act, the delay in implementing the new withholding tables, and other changes that may have occurred in a taxpayer’s life during the year, it is very likely that a revised Form W-4 will be needed to determine the most accurate withholding.
Tax practitioners can greatly assist clients in making sure that the information entered into the W-4 calculator or the Form W-4 worksheets is as accurate as possible in order to achieve the most accurate results.
A parting note from George Jones: A thank you to Mark Luscombe, Accounting Today, and our readers. After 21 years of co-authoring the Tax Strategy column with Mark Luscombe, I am officially retiring. Looking back, I am particularly grateful to Mark for allowing me to share the stage with him. A shout-out, too, to Dan Hood of Accounting Today for his vision in shaping the column. Finally, thanks to you, our readers, for taking the time each month to hear what we had to say. I look forward to joining you in following Mark Luscombe as he ably continues to explore new tax strategies with you.