Late last fall, we predicted that changes from the Tax Cuts and Jobs Act of 2017 would have a significant impact on many of our clients in 2018. Unfortunately, for most of you that impact came in the form of refunds that were $3,500 to $4,500 lower, or balances due that saw an increase of $5,000 to $7,000 over the previous year.
How did this happen? What we found is that the withholding tables under the new tax code are severely skewed—in the wrong direction for many taxpayers. In order to correct the situation for our clients who would like to see their refunds or amounts owed come closer to 2017 levels, we are suggesting a simple solution: Adjust your withholding now.
To make this adjustment you’ll need to complete a new W-4 form, and fill in the extra amount you want withheld on Line 6. Just be sure not to change your filing status (e.g. if you currently claim “Married -0-“, do not change that).
For example: Say you saw a $4,000 difference between 2017 and 2018, and you have 10 pay periods left this year. Simply divide the amount by the number of pay periods and add the result to the withholding amount for your remaining paychecks.
In this case, $4,000 ÷ 10 = $400 per paycheck, so you would enter $400 on Line 6 of your new W-4.
The problem is also magnified if you have multiple sources of income. A married couple that has three or four W-2 forms will see a lower federal withholding on their second job(s), which may not cover what is owed.
Consider this: Most people earning between $25,000 and $50,000 will only have 7% or 8% Federal tax withheld from their paycheck. Since many taxpayers in this situation may have income from other sources that put them in the 22-24% tax bracket, the minimal 7% or 8% federal withholding will likely result in a balance due.
You’ll need to remember that increasing your withholding will reduce the amount of your paychecks, but if your income is similar to 2018 you’ll see a corresponding increase in your refund, or decrease in your balance due, for 2019.
Feel free to contact our office if you have questions, or need help determining whether and how much to adjust! email@example.com or 781-337-8788