TAXPAYERS WITH HIGH INCOMES, COMPLEX RETURNS: CHECK WITHHOLDING SOON TO AVOID A YEAR-END TAX SURPRISE

The Internal Revenue Service is urging high-income taxpayers and those with complex tax returns to check their withholding soon to avoid an unexpected tax bill or penalty when they file their 2018 federal income tax return in 2019.
Any of changes of the Tax Cuts and Jobs Act (TCJA) could have a big impact on the tax refund or balance due on the tax return taxpayers file next year. That’s why the IRS encourages every employee to do a “paycheck checkup” soon to check that they are having the right amount of tax taken out of their pay. The IRS Withholding Calculator and Publication 505 , Tax Withholding and Estimated Tax, can help.

A checkup is especially important for those with high incomes and complex returns because they are often affected by more of these changes than people with simpler returns. This is also true if they also make quarterly estimated tax payments to cover other sources of income or are subject to the self-employment tax or alternative minimum tax.

Changes that affect high-income taxpayers

For 2018, the standard deduction nearly doubled to $24,000 for joint filers and $12,000 for singles. There were also numerous changes to itemized deductions, including:

  • A $10,000 cap on deductions for state and local property, sales and income taxes.
  • New limits on deductions for some mortgage interest and home equity debt.
  • Higher limits on the percent of income a taxpayer can deduct as charitable contributions.
  • No deduction for those miscellaneous expenses that, in prior tax years, had to exceed 2 percent of a filer’s income to qualify. These included investment expenses and un-reimbursed employee expenses such as travel, meals, entertainment and uniforms.

Many who itemized in the past may find they’ll pay less tax in 2018 by taking the standard deduction.

Do a ‘paycheck checkup’ soon Checking and adjusting how much tax is withheld from pay now can prevent an unexpected tax bill and penalties next year at tax time. It can also help taxpayers avoid a large tax refund, if they’d prefer their money in their paychecks throughout the year. Taxpayers need to adjust their withholding as soon as possible for an even, consistent amount of withholding throughout the rest of the year. Waiting means there are fewer pay periods to withhold the necessary federal tax – so more tax will have to be withheld from each remaining paycheck.

Though primarily designed for employees who receive wages, the Withholding Calculator can also be helpful to some taxpayers receiving pension and annuity income. Recipients of pensions and annuities can change their withholding by completing Form W-4P and submitting it to their payer.

All taxpayers should remember that if their personal circumstances change during the year, they should re-check their withholding.

People with more complex situations may need to use Publication 505

Taxpayers with more complex situations might need to use Publication 505instead of the Withholding Calculator . This includes employees who owe self-employment tax, the alternative minimum tax or tax on unearned income from dependents. It can also help those who receive non-wage income such as dividends, capital gains, rents and royalties. The publication includes worksheets and examples to guide taxpayers through these special situations.

In some of these situations, a household may make estimated tax payments but also have tax withheld by an employer. It’s important to account for both amounts when figuring how much tax to have an employer withhold. Publication 505 helps taxpayers include estimated tax payments; the Withholding Calculator does not.

Adjusting withholding

If an employee determines they should adjust their withholding, they should complete a new Form W-4 and submit it to their employer as soon as possible. Some employers have an electronic method to update a Form W-4.

If an employee has a change in personal circumstances that reduces the number of withholding allowances they can claim, they must submit a new Form W-4 within 10 days of the change with the correct number of allowances.

As a rule, the fewer withholding allowances an employee enters on the Form W-4, the higher their tax withholding will be. Entering “0” or “1” on line 5 of the Form W-4 means more tax will be withheld. Entering a bigger number means less tax withholding, resulting in a smaller tax refund or potentially a tax bill or penalty.

Taxpayers may also need to determine if they should make adjustments to their state or local withholding. They can contact their state’s department of revenue to learn more.

Additional information

The Withholding Calculator does not request personally identifiable information such as name, Social Security number, address or bank account number. The IRS does not save or record the information entered on the calculator. As always, taxpayers should watch out for tax scams, especially via email or phone and be alert to cybercriminals impersonating the IRS. The IRS does not send emails related to the calculator or the information entered in it.

The calculator and Publication 505 are not tax-planning tools. Taxpayers needing advice regarding the new tax law and their personal situation should consult a trusted tax professional.

(Source: National Society of Tax Professionals) ​