Starting in Feb., an unwelcome surprise lurks for many taxpayers

Discuss whatever you want here ... movies, books, recipes, politics, beer, wine, TV ... everything except classical music.

Moderators: Lance, Corlyss_D

Post Reply
Posts: 4999
Joined: Sun May 29, 2005 7:06 am
Location: Cleveland, Ohio

Starting in Feb., an unwelcome surprise lurks for many taxpayers

Post by jserraglio » Fri Jan 19, 2018 12:40 pm

Wall Street Journal
Tax Report
Workers’ withholding may no longer reflect what is owed for the current year or anticipated refunds
In the next few weeks, don’t fail to go over your paycheck withholding. You could avoid a bad surprise.
Recently the Treasury Department announced revisions to the 2018 withholding tables to reflect the massive tax changes Congress enacted late last year. These and other changes allow employers to use workers’ W-4 forms already on file to adjust their withholding to reflect tax cuts in the new law.
The coming changes to withholding mean that more than 90% of workers will see bigger paychecks as early as next month, according to estimates by the government. The Tax Policy Center estimates that about 80% of all filers will see a tax cut for 2018, while about 5% will see an increase, with no change for the rest.
But don’t be lulled into inaction if your paycheck gets bigger in February. Many Americans’ W-4 forms haven’t been updated in years. In addition, the W-4 form being used by employers to calculate new withholding is based on a provision that has been repealed.
The upshot is that changes to paychecks may not reflect what a taxpayer will owe for tax year 2018, or the size of future tax refunds. Taxpayers who are under-withheld could owe penalties, and some who count on getting large refunds could be shocked to see them shrink.
“Individual results are going to vary widely, and people can’t assume that paycheck withholding equals their tax bill for 2018,” says Mary Hevener, a payroll tax specialist and attorney at Morgan, Lewis & Bockius.
According to Treasury officials, the new withholding tables have been adjusted to reflect the larger standard deduction, lower tax rates, and the repeal of the personal exemption.
But the tables couldn’t take into account changes that affect individuals differently. So they don’t include the shrinking alternative-minimum tax, the expanded child credit, or the repeal of deductions for state and local taxes. The new tables also try to avoid over- and under-withholding for taxpayers with simple returns, Treasury officials said. Last year, about 75% of taxpayers got refunds averaging nearly $2,800.
For example, say that Sharon has a simple return and is accustomed to getting a $3,000 refund that she uses to pay down debt or purchase health care. Under the new withholding tables, she might get a larger paycheck but also be at risk of receiving a smaller refund than she is used to, if she doesn’t further adjust her withholding.
Or, say that Mike owes high federal and state taxes that he will no longer be able to deduct, other than $10,000. But his W-4 form on file with his employer reflects his ability to take these deductions in prior years. As a result, Mike might be under-withheld for tax year 2018.
Officials at Treasury and the Internal Revenue Service are now working on a new withholding calculator and revised W-4 form they hope to post in February. They are planning an extensive campaign aimed at getting as many taxpayers as possible to fine-tune their withholding to avoid under-withholding or get the size of refund they want. Unlike after the 1986 tax reform, Congress hasn’t required all employees to file new W-4 forms.
Meanwhile, tax specialists are starting to identify categories of taxpayers who may be under-withheld as a result of the tax rate and withholding changes.
Many agree that taxpayers at high risk of being under-withheld are those with large itemized deductions that have been repealed or limited. These include write-offs for state and local taxes and miscellaneous expenses, such as those not reimbursed by an employer.
Others at risk of under-withholding, says Ms. Hevener, include employees who have bonuses, stock options, commissions, and the like—because the special withholding rate on them has dropped to 22% from 25%.
Many taxpayers with dependents age 17 or older should also be wary, says analyst Scott Greenberg of the Tax Foundation. They qualify for a tax credit of $500 rather than $2,000 and in some cases that will be worth less than the $4,150 personal exemption that has been repealed.
While tax rates and withholding are changing, underpayment penalties aren’t. The basic rule is that taxpayers must pay in at least 90% of what they owe by the April filing date or risk an interest-based penalty on the underpayment.
The interest rate resets quarterly, but currently it is 4%. As taxes are due quarterly, the interest on underpayments is often well below the stated rate because it is only charged for part of the year.
— Laura Saunders

Post Reply

Who is online

Users browsing this forum: No registered users and 13 guests