President Trump signed the Tax Cuts and Jobs Act (TCJA) into law on December 22, 2017. It has been touted as the most significant tax overhaul in the United States in decades. While the changes don’t go into effect until 2019, you should still consider recalculating your withholdings to make sure you don’t owe anything come tax time.
Why Checking Your Withholdings Matters
Most people purposely over-withhold taxes to receive a large refund each year. According to the IRS, more than 70 percent of filers received refunds in 2016, with the average refund surpassing $2,800.1 While a check in the mail is always a welcome surprise, you may wish to adjust your withholdings so they align more accurately with the tax you will actually owe. This way, you can spend or save more money throughout the year.
It is a much more grievous mistake to under-withhold your taxes. If you do not withhold at least 90 percent of what you owe in taxes by the end of the year, and if you do not pay estimated tax, you will likely be subject to a penalty.
How the New Tax Law May Affect Withholdings
Even if you have always received a refund in the past, you still want to ensure your employer is withholding the right amount of money from your paycheck. The new law could drastically alter your tax returns and includes:
- Changes in tax brackets and rates – Under the new law, there are still seven tax brackets, and those with a lower income will be taxed less than those with a higher income. However, the income ranges for the brackets have changed as well as the tax rates that apply to each bracket. NerdWallet provides an excellent breakdown of the new tax rates and brackets and how they compare to the old ones.
- Elimination of the personal exemption – In 2017, filers could claim a personal exemption of $4,050 each for themselves, their spouse and any dependent children they had. That exemption has been eliminated from 2018 to 2025.2
- Nearly doubled standard deduction – Although the personal exemption is now gone, many filers will be happy to hear that standard deductions have been increased across the board. Here is a summary of the changes:
- Single taxpayer OR married taxpayer filing separately – $6,350 increases to $12,000
- Married taxpayer filing jointly – $12,700 increases to $24,000
- Head of household – $9,350 increases to $18,0003
- Increased child tax credit – The previous child tax credit, which applies to dependents under age 17, was $1,000 per child. That has now increased to $2,000 per child. The amount that is refundable has also increased to $1,400, meaning those who have no tax liability can still receive this money.
- Elimination or limitation of some deductions – For those who have itemized in the past, there will likely be many changes to how you file next year. One of the biggest changes is the new $10,000 cap on deductions for property taxes plus state and local income taxes or sales taxes. Another change is that homeowners can now only deduct interest on mortgages up to $750,000, which could affect those who reside in areas with a high cost of living.4
As you can see, all of these changes combined can easily affect the amount you should be withholding from your paycheck. For example, if you used to rely on itemized deductions in the past that have now been eliminated, you may wish to go with the standard deduction instead. This could change your amount of taxable income, and thus, your tax bracket.
You may want to consider recalculating your withholdings and updating your W-4 now so you don’t owe money in 2019.
Withholdings Tables and Calculator
Tax reform is always difficult to understand, but luckily, the IRS has provided several tools to make it easier for you to calculate how much you need to withhold.
The first is the newly released Notice 1036, which outlines the withholding tables for 2018. These tables indicate how much money you can expect from a single withholding allowance based on how often you get paid, your income and your marital status. This information is helpful because Form W-4 does not outline specific dollar amounts for withholding allowances.
The second is a withholding calculator that lets you input certain details about your financial situation to estimate what your withholdings should be. This tool is more in-depth than the pages attached to the W-4 and may be especially helpful for those who live in a two-income household, have dependents, have a higher income, work part of the year, work multiple jobs or itemize their deductions. It will also help anyone who has under-withheld or over-withheld in previous years.
Those with particularly complicated financial situations will find more detailed information on withholdings in Publication 505, Tax Withholding and Estimated Tax, which will be updated soon for 2018.
Help Reduce Your Taxes With Heafner Financial
Any time tax reform is passed, politicians want you to believe the new rules benefit you, whether you’re a business owner or not, single or married, young or old, rich or poor. While this may well be true for you, many Americans are simply stumped when it comes to using tax reform to their benefit.
At Heafner Financial, we offer tax reduction services so you know how the law can work for you. We’ve even made a simplified guide summarizing the new tax law so you understand exactly what will be changing next year.
If you’re interested in reducing your tax liability, contact our financial advisers online or call (704) 552-1230 today!