Knowledge and Insights
Unintended Consequences of Changes to Withholding Rates Under New Tax Law
With the passage of the new tax law on December 22, 2017, there may be some unintended consequences of which everyone should be aware. One change directly affected the federal income tax withholding rate at which taxes are withheld from paychecks. Employers are required to use these new rates and ultimately reduce employees’ federal withholding in their paychecks. You may have already noticed an increase in your net pay since the new tax tables were implemented. Tax also may be withheld from certain other income — including pensions, bonuses, commissions and gambling winnings. Depending on your individual situation, this may create an underpayment of tax when you prepare your 2018 federal income tax return.
To be sure that you have enough tax paid in to avoid having a balance due and possibly owing penalties, we recommend that everyone do a “paycheck checkup” as soon as possible in order to correct any underpayment sooner rather than later.
The amount that is withheld from your regular pay depends on the amount you earn and the information you list on Form W-4. This is the form that you provide to your employer to determine how much is withheld from your paycheck to cover your federal tax liability. Form W-4 looks at your marital status and the number of withholding allowances you claim to help calculate the amount of federal withholding that should be withheld from your paycheck based on the IRS income tax withholding tables. The new tables were designed to make sure that most taxpayers do not over- or under-withhold based on the new higher standard deductions and repeal of personal exemptions. However, they do not take into account caps on certain itemized deductions, increases in the child tax credit or the dependent credit that have also changed within the new tax law.
While it is nice to see an increase in your take-home pay, it is possible that based on a two-income family, that the decrease in federal withholding could put you in an underpayment situation.
If you are not sure if your federal withholdings are adequate or if you think a paycheck checkup is right for you at this time, please contact me at firstname.lastname@example.org or 609-689-9700. I’ll be happy to assist you.