Millions could face withholding-related tax bills next year
Thursday, August 02, 2018
We're on the downside of 2018 and that has some folks in the tax world, and on Capitol Hill, concerned.
They're worried that unless folks act soon, they're going to get an unwelcome surprise next federal tax filing season. When they fill out their new Form 1040s, they'll discover they owe.
The reason is the new Tax Cuts and Jobs Act (TCJA).
OK, technically it's because a lot of folks haven't adjusted their payroll withholding to account for the new lower income tax rates and other changes, like no more exemptions and revised of eliminated itemized expenses.
It's not for lack of warning. The IRS (and news outlets and me and my fellow financial bloggers) have tried to alert folks and encourage them to adjust their withholding to get it more in line with the new tax laws.
Some have listened. Others, though, are just rolling the dice.
Millions not withholding enough: That means, according to a Government Accountability Office (GAO) report released July 31, 30 million American workers are not having enough tax withheld from their paychecks and are going to owe next April.
That's 21 percent of the taxpaying population that's opted to get more money every pay day, according to the simulations run by the Treasury Department and discussed in the GAO report.
If the tax laws had not changed, the GAO says that 18 percent of taxpayers, or about 27 million people, would be underwithholding.
I get it. You got a few more bucks in your paycheck from the new tax bill. And boy did you need it.
Daily expenses — from the electric company's rates to groceries to gasoline to everything associated with your kids — seems to go up every year. Meanwhile, you haven't gotten a substantial pay raise in a while, even with the new tax law, but that's for another post.
So you're enjoying a bit of financial breathing room with the reduced payroll withholding.
And with the holidays fast approaching — yes, I've seen the Christmas displays already — you and most of your similarly situated coworkers aren't going to want to give up the extra pay that comes thanks to underwithholding.
But Uncle Sam eventually gets his cut. So they better be prepared to pay at tax-filing time.
On the flip side: What about folks who overwithhold every year so that they'll get a refund when they do their taxes?
The GAO report says that the Treasury withholding simulations found 73 percent of taxpayers are overwithholding under the new tax law.
Whether it's intentional or just because they didn't want to mess with figuring their correct payroll withholding under TCJA, the results will be the same. They will get refunds when they complete their 2018 taxes next year.
That's a pretty close match to historical refund numbers. The IRS says that around three-quarters of taxpayers get refunds each year.
If the GOP tax bill hadn't been enacted, Treasury found that 76 percent would have been overwithheld, producing refunds.
That means some folks (the 3 percent difference) who think they'll get a tax refund might be in for an unpleasant surprise next filing season. Their refund will be smaller or maybe none at all.
Be a withholding Goldilocks: By now, math whiz readers have figured out that the projections for next tax season in the both cases, with new Internal Revenue Code provisions and as if the laws hadn't change, come to 94 percent of taxpayers:
21% underwithholding + 73% overwithholding under TCJA = 94%
18% underwithholding + 76% overwithholding under old laws = 94%
Even I can do the next calculation in my head. In both cases, just 6 percent of taxpayers have the correct amount of tax withheld.
That's a disappointingly paltry percentage in the estimation of both the IRS and the tax professionals (and writers like me) who regularly nag advise taxpayers to adjust their withholding so that it meets Goldilocks' just-right standard.
When folks get to that point, it means the IRS doesn't have to worry about issuing refunds — which in many cases must be held until mid-February — to filers who are constantly checking up on their checks.
As for filers, if you get your money throughout the year, you don't have to worry about how long it will take the IRS to process your return and send you your tax cash.
In owing scenarios, it saves the IRS from having to come after you for you due taxes. And you don't have to worry about how you're going to get the money to pay your taxes.
Run your withholding numbers: To get to the figure where you don't owe a lot or aren't going to have to pay at tax time, you need to run your numbers.
The IRS revised its payroll withholding online calculator to help here. It will offer guidance on how many allowances to claim on your Form W-4.
The online withholding tool appears to be popular.
The IRS reports that on March 1, the day after the online calculator was launched, it received more than 300,000 unique views. That's up dramatically for the more than 44,000 unique visits to the tool on Jan. 1, 2017, the day with the most unique views in 2017.
And between the calculator's launch on Feb. 28 and April 6, it had 352 percent more hits than during the same period the prior year.
If you haven't given the calculator a look, do so and soon. We've got just less than five months left in the tax year. Since you're probably part of the 94 percent of taxpayers who needs to nudge withholding up or down a bit, you need to make the change quickly so that the paycheck amount will be spread over this longer time frame.
Pay yourself, not the IRS: Finally, since most folks get refunds, I'll repeat the advice I've given here on the ol' blog many times.
If you intentionally overwithhold because you're afraid you'll simply blow the extra pay, set up an automatic paycheck deposit to a saving account at your bank or credit union for the too much you were having taken out of your check each pay period.
That's just like withholding, but it's more under you control.
You can leave it along until next year, just like you would have if you had to wait to file to get it. Or you can take some out to pay for Christmas gifts or cover that emergency car repair.
Regardless, it will be your choice, not Uncle Sam's. Plus, you'll earn a tiny bit of interest.
You also might find these items of interest:
- The pros and cons of tax refunds
- It's time for itemizers to check payroll tax withholding
- Got a refund? Owe the IRS? Time for a Paycheck Checkup!
I have checked this several times as yes there is an issue.
But for me it is complicated in that my wife retired and then there was a massive pay out so they withheld way to much.
It is best to go to the IRS website and use there on line calculator for this. It may take several tries to get it right but well worth it.
Posted by: Coopersmith | Thursday, August 02, 2018 at 07:29 PM