The IRS recently sent out a press release reminding taxpayers to perform a “payroll checkup” noting that changes made by the Tax Cuts and Jobs Act (TCJA) may warrant an adjustment. At YHB we have sent our serval articles and put on presentations to explain some of the significant tax changes made by TCJA and how it may affect the amount of itemized deductions that can be claimed and whether you should itemize or claim the standard deduction. I will not try detail all the changes here. My intent is to provide you guidance to help you determine if you should go to the IRS website and use their withholding calculator. Better yet, contact us to help you do a complete checkup.
Your employer was required to adjust your withholding to reflect the changes in the tax rates as a result of TCJA shortly after the law passed. However, these changes do not reflect the changes in itemized deductions. As a result, you could end be withholding too much. Or worse, you may end up owing taxes if the decrease in tax rates is partially or completely offset by a decrease in your itemized deductions. The IRS warned that having too little tax withheld could result in an unexpected tax bill or penalty at tax time in 2019.
The changes we see that are having the biggest impact on taxpayers include:
- Nearly doubling the standard deductions;
- $10,000 limit on the deduction for all state and local taxes;
- Elimination of the deductions for employee business expenses, tax preparation fees, investment expenses, including investment advisory fees, safe deposit box fees and investment expense from pass-through entities
- Increase in the exemptions and phase-outs for taxpayers subject to the Alternative Minimum Tax
- Increase in tax credit and phase out for taxpayers with dependent children under the age of 17 and a new credit for non-child dependent.
If you have any of the above the IRS is urging you to perform a “payroll checkup” and to do so as early as possible so that if a withholding amount adjustment is necessary, there’s more time for withholding to take place evenly throughout the year. The IRS cautioned that waiting means there are fewer pay periods to make the tax changes.
You can find the withholding calculator at irs.gov/individuals/irs-withholding-calculator, you can indicate whether you are taking the standard deduction or itemizing their deductions. If you are itemizing, you’ll enter estimates of your deductions. The withholding calculator applies the new law to these amounts when figuring your withholding.
You should have your 2017 tax return when using the withholding calculator, as well as your most recent pay stubs. IRS also noted that if a taxpayer’s personal circumstances change during the year, they should re-calculate their withholding at that time. Adjustments to your withholding can be done by submitting an updated Form W-4 Employee’s Withholding Allowance Certificate to your employer.
For peace of mind and to save yourself time and aggravation we can perform the checkup for you. We have a firm understanding of the new tax law and our planning software has been updated to handle the changes. Contact us at your earliest convenience and we will schedule you for a payroll withholding checkup.
About the Author
James Snyder, CPA, CSPM is a principal at YHB in the Leesburg, VA office. He provides income and estate planning services, business consulting, and estate and trust administration services to successful individuals in many professions, especially engineering, law, technology and real estate. He also provides strategic guidance and planning for clients involved in stock option transactions and wealth transfer.