For most taxpayers, the Tax Cuts and Jobs Act reduced the overall tax burden. However, even though taxpayers will see an overall reduction in their taxes, many of them could still end up with a nasty tax bill at year end.
Following passage of the TCJA, the IRS released updated withholding tables to reflect the new law. As a result, many people saw their paychecks increase. But the withholding tables didn’t take into account the wide range of individual circumstances affecting exemptions.
By having your employer withhold taxes from your paycheck, you spread out your tax liability and avoid underpayment penalties. You may have withheld the right amount in the past, but TCJA changes may have altered your situation. The IRS advises that families with complex tax situations may have their income taxes withheld incorrectly and may end up owing more.
Most families should double check
It’s generally a good idea to review your withholding annually or when you have a significant life change. But these families should make a particular effort to review their withholdings:
- People living in high-tax states
- Two-income households
- Households with children
- People who itemized deductions in 2017
- Anyone with a large tax bill or large refund in 2017
The loss of certain exemptions may not be offset by the higher standard deduction. Some taxpayers could end up with a larger return than expected while others will be saddled with a challenging tax bill.
The sooner you review, the better
The fix: Use the IRS online withholding calculator to review your withholding. Better yet, sit down with your tax adviser to get a clear understanding of your upcoming liability. With just a few months left in the year, changing your withholding now may not completely correct any discrepancies.
Talking with an adviser can help you figure out if you should be expecting a large tax burden next spring — and give you extra time to save.