An often overlooked but important part of tax planning is the amount you have withheld from your paycheck. Under-withhold throughout the year and you may end up owing taxes in April. Over-withhold and you may be needlessly restricting cash flow throughout the year.
President Trump signed the Tax Cut and Jobs Act (TCJA) into law on December 22nd, 2017. The new law lowers tax rates across the board.[i]
The immediate impact is that roughly 90% of taxpayers have seen an increase in their take-home pay[ii]. Yet, due to the persistent complexity of the tax code and the ways in which it was altered, now is a great time to review your withholding. Here are five reasons to review your income tax withholding based on the new law:
- Lower taxation on bonuses and commissions. Previously taxed at a flat 25%, the new rate is 22%. If a large portion of your pay comes in either of these forms and you find yourself in the 24%+ bracket, then you probably aren’t having enough withheld. It may be wise to try to make up the difference with higher withholding throughout the year.
- Loss of personal exemptions. Personal exemptions have been “suspended” until 2025. Despite the standard deduction nearly doubling, this still puts married couples with 1 or more children at a disadvantage as the new deduction of $24,000 is lower than last year’s standard deduction plus three personal exemptions ($12,700 + $4,050 + $4,050 + $4,050 = $24,850). Even more, the loss of the personal exemption hurts taxpayers who itemize their deductions and aren’t able to take advantage of the doubling of the standard deduction.
- Caps on deductibility of state and local income tax. In prior years, taxpayers who itemized their deductions were able to deduct 100% of the state and local tax they paid. (This includes property taxes.) Going forward, these are capped at $10,000. There are those that argue this is punitive against many blue states as they tend to have higher income and property taxes. Regardless, this significant change makes it more difficult to itemize your deductions.
- Suspending of the Pease Limitation. In short, the Pease Limitation put a cap on itemized deductions for higher wage earners, making it more likely they would experience the misery of the Alternative Minimum Tax. (AMT.) The TCJA suspends the Pease Limitation, theoretically reducing the chances you’ll fall into the AMT.
- Expansion of the Child Tax Credit. In 2018, the income limits for this partially-refundable credit increased to $200,000 for single filers or $400,000 for joint filers and is worth $2,000 per qualifying child. Previously, the credit was $1,000 per qualifying child and began to phase-out at income levels of $75,000 for single filers and $110,000 for joint filers. These changes make it more likely taxpayers with qualifying children will receive this credit.
Some of the changes brought about by the TCJA will work in your favor while some will work against you. Rather than going into any further discussion about whether the changes will be a net positive or net negative to you, we encourage you to review your income tax withholding to get out in front of any potential surprises when you file your 2018 taxes. The IRS provides a helpful Withholding Calculator or, better yet, work with your CPA. He or she can run some projections based on the new tax law and help guide you on any necessary adjustments to your withholding.
Also, don’t forget to include any one-time events like the sale of a business or vacation home that might further impact your tax liability.
As always, please let us know how we can help.