One of the first trouble spots of the new tax reform is the W-2 withholding for 2018. Passage of the new law in late December hasn’t given the IRS much time to develop new withholding tables. This can be a big issue, as the recent Tax Cuts & Jobs Act (TCJA) substantially altered the tax rates and standard deductions, eliminated exemption deductions, and increased the child tax credits—all elements of how the withholding allowances and tables have been structured in the past.
On January 11, the IRS released modified withholding tables for employers to use for determining employee withholding. The new withholding tables have been crafted to use the information employers already have from employees’ prior Form W-4s on file to adjust their employees’ withholding, taking into account the tax cuts for individuals included in the TCJA.
The IRS is also working on revising the Form W-4 to reflect additional modifications in the new law, such as changes in available itemized deductions, increases in the child tax credit, the new dependent credit and repeal of the dependent exemptions deduction.
When available, the new Form W-4 can be used by employees who wish to update their withholding in response to the new law or changes in their personal circumstances in 2018 and by workers starting a new job. Until a new Form W-4 is issued, employees and employers should continue to use the 2017 Form W-4.
You are cautioned to keep an eye on your take-home pay to ensure your withholding has not changed too drastically once your employer starts using the new IRS tables. Most wage earners should see a decrease in withholding (and a larger net paycheck), but if the change is too radical you could end up owing tax next year when you file your 2018 return.
If you are self-employed and/or have other sources of taxable income in addition to wages, or if you itemize your deductions, the wage withholding by your employer based upon your existing Form W-4 probably won't provide the correct withholding, and you may need to make adjustments to your withholding allowances or even make estimated tax payments.
As 2018 is the first year that the vast majority of the provisions of TCJA will apply, you should be cautious that your withholding is not too little, resulting in a tax due next filing season, or too high, denying you the benefits of the tax cut until you receive your refund next year. Of course, the latter is always an option if you want to play it safe. You could ask your employer to NOT change your withholding based on the new withholding tables. This should result in a larger tax refund next year. Food for thought.
Please contact us if you have questions about the new tax law. We will do our best to help you understand how it may affect you.
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