With the implementation of the Tax Cuts and Jobs Act (“Act”), it is important for Taxpayers to ensure that they have withheld the appropriate amount from their paychecks or are making sufficient estimated tax payments for the 2018 tax year. This can help Taxpayers to avoid unexpected underpayments causing penalties and interest. Alternatively, it can prevent unexpected overpayments, allowing Taxpayers to receive more of their money throughout the rest of this year rather than waiting until next year to file and receive a refund.
Provisions of the Act that could have a significant impact in 2018 include the following: reduced tax rates, revised tax brackets, business deductions, personal exemptions and deductions and expanded and increased child tax credits. Accordingly, many taxpayers will find themselves in a different tax position in 2018 than they were in previous years.
The Internal Revenue Service (“IRS”) has released various guidance to assist taxpayers in determining an estimate of their 2018 tax liability and on making quarterly estimated tax payments.
Taxpayers can perform a “Paycheck Checkup” by accessing the IRS’s Withholding Calculator. It is recommended to have a copy of the previous year’s return and most recent paystubs on hand while using the calculator to provide the most accurate information and receive meaningful results. According to the IRS, “the tool will recommend the number of allowances the employee should claim on their Form W-4.”
Employees who wish to change their withholding amounts can adjust their withholding by changing their withholding allowances on Form W-4, Employee’s Withholding Allowance Certificate. Alternatively, an employee can request that a set amount be withheld instead of claiming allowances or request a combination of both. The revised W-4 should be submitted to the employer as soon as possible.
It is important to note that a mid-year withholding change in 2018 may have a different full year impact in 2019. It is recommended to check withholding again in early 2019 to avoid this scenario. Taxpayers with more complex tax situations are encouraged to refer to IRS Publication 505, Tax Withholding and Estimated Tax for additional guidance.
Taxpayers who typically need to make quarterly estimated tax payments include self-employed individuals, investors and retirees. Additionally, any taxpayer who receives income that is not subject to withholding should also consider making quarterly estimated tax payments. Income that is not subject to withholding generally includes, but is not limited to, interest, dividends, capital gains, rental income and alimony.
Our tax system requires taxpayers to pay tax as income is earned. Thus, the lesser of 90% of a taxpayer’s current tax liability or 100% (110% if Taxpayer’s income exceeds $150,000) of prior year tax liability must be prepaid throughout the year through withholding or estimated tax payments. Doing so will avoid or minimize penalties and interest when filing the 2018 tax return.
The IRS has released a revised estimated tax package, Form 1040-ES, which can also be found on the IRS’ website. The package includes a summary of key changes as well as worksheets to assist Taxpayers in calculating their tax liability for tax year 2018. Additionally, IRS Publication 505 offers information and examples that can be used by Taxpayers.
Estimated tax payments for tax year 2018, for most Taxpayers, are due on: April 17, 2018, June 15, 2018, September 17, 2018 and January 15, 2019. The most efficient way to make these payments is by using IRS Direct Pay or the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). Other options include same-day wire, check or money order and cash at an official payment site. Information on payment options can be accessed here.
It is recommended that Taxpayers review their withholding and/or their estimated tax payments prior to the end of the year, if they haven’t done so already. Adjusting withholding or estimates can prevent Taxpayers from having too little or too much paid in, an unexpected tax bill or a penalty at tax time in 2019.
For questions or to speak with a member of Withum’s Tax Services Group, please contact us by filling out the form below.