Is it time to check my withholding?
With the tax changes that are now in place for 2018, the IRS is encouraging taxpayers to review their individual tax situations and to check and adjust their withholding, if needed. In other words, “a paycheck checkup.” Checking and adjusting withholding can help prevent an unexpected tax bill this upcoming April.
The General Accounting Office (GAO) is warning taxpayers that they might owe money when filing their 2018 tax returns. In addition to the changes to itemized deductions and the additional child tax credit, as a result of the new tax rates, the IRS issued new withholding tables for employers to use when computing withholding on employees’ pay. The GAO analyzed how these new tables were working and found that taxpayers are “likely not” withholding the proper amounts from their paychecks. Since the new tax rates are going down, the new withholding tables aim to reduce what is withheld from your paycheck resulting in more net pay going in your pocket. Therefore, the new withholding levels could result in a balance due when filing your return even though your tax liability is going down with the lower rates.
How do I know if I need a checkup?
- Do you have Dependents?
If you have a qualifying child under the age of 17, you may be entitled to additional tax credits starting in 2018. As part of the Tax Cuts and Jobs Act (TCJA), the Child Tax Credit was increased to $2,000 per qualifying child (it was $1,000 in 2017). In addition, the income threshold for which the credit is phased out has been increased as well. In 2017, for a married couple, the income phase-out started at $110,000. Now, the phase-out begins at $400,000 which will allow for a lot of taxpayers to be able to take the credit that couldn’t in the past. A portion of this credit is also refundable (up to $1,400), which means you could still receive the credit even if your tax liability was less than the credit.
In addition to the expanded Child Tax Credit, the Credit for Other Dependents was added with the TCJA. This credit is for other dependents (children age 17 or older, a parent living with you, etc.). This credit is $500 for each qualifying dependent and the income phase-out levels are the same as the Child Tax Credit. The $500 credit is nonrefundable.
These changes to the child tax credit are great, but remember that personal exemptions have now been eliminated. Therefore, this is just another factor you need to weigh to determine the correct withholding levels.
- Did you itemize last year?
If you filed your taxes last year itemizing your deductions, chances are you will be taking the increased standard deduction instead ($24,000 for MFJ and $12,000 for Single).
To recap some of the changes that are occurring:
- You can deduct the part of your medical and dental expenses that is more than 7.5 percent of your adjusted gross income.
- Your deduction of state and local income, sales, and property taxes is limited to a combined, total deduction of $10,000 ($5,000 if married filing separately).
- You can no longer deduct job-related expenses or other miscellaneous itemized deductions that were subject to the 2 percent of AGI floor. You may still deduct certain other items on Schedule A, such as gambling losses.
- Mortgage interest paid is still deductible with some changes to indebtedness limitations
- The limit on charitable contributions of cash has increased from 50 percent to 60 percent of your adjusted gross income.
How will this impact me and my withholding?
Credits going up? Itemized deductions going down? There is no definitive answer on how your 2018 tax return will look this April. If you would like some help to better understand the changes to you and your family, please contact our tax members at Team DKB! We can review your situation and make recommendations on tax planning strategies and changes to your withholding levels.