Did you owe more on your 2018 federal tax return then you expected? This was a result of IRS changes to the withholding tables in 2018. Many taxpayers discovered when they filed their 2018 returns that they unexpectedly owed taxes because the federal withholding on their paychecks decreased significantly. Those who received large bonuses or other supplemental income were particularly hit hard because the flat withholding rate went down to 22%, regardless of your actual tax bracket or W-4 exemptions.
This change resulted in a lot of stress during the 2019 filing season. Even though the IRS urged taxpayers to do a payroll check up during the year the process was complicated and very few taxpayers actually paid attention. The result was bad news for many people who usually receive refunds on their tax returns.
The issue has not resolved for the 2019 tax year. We are reviewing 2019 YTD withholding for our clients and even those claiming ZERO on the W-4 are having too little taxes withheld. If your employer isn’t withholding enough taxes on your regular wages, it’s your responsibility to review and change your withholding by filing a revised W-4 form.
The problem with the W-4 is that the old term “exemption” doesn’t mean anything because the new tax law took away your exemptions. The current W-4 is much more complicated to figure out and has received negative reviews because it reveals too much information to employers. The IRS knows that this is an issue and has unveiled a new W-4 form to take effect for 2020. You will not be required to submit a new W-4 to your employer, but we highly recommend that you do a withholding check up.
Here is the IRS comment regarding the new 2020 W-4 form:
“Our dedicated staff at the Treasury and IRS worked tirelessly over the past year to produce a Form W-4 that is more accurate, transparent and simplifies the tax withholding experience for hardworking Americans,” said Treasury Secretary Steven T. Mnuchin in a statement. “We are proud that the Tax Cuts and Jobs Act lowered taxes for most Americans and are enthusiastic that the improved W-4 will help taxpayers better determine the correct withholding amount for their personal financial situation to more readily reap the benefits of historic tax reform.”
We recommend that you take a look at your most recent pay stub. Do a simple calculation to determine your withholding as a percentage of taxable income. (Divide the federal YTD withholding by your YTD taxable income.) If you know your effective tax rate is (for example) 15% and your YTD withholding is only 12% then you will likely owe on your 2019 federal return. If you have investment income or other sources of income and in past years your paycheck withholding covered taxes on this income, you might need to add additional withholding to your paycheck or make quarterly estimated tax payments. If you have any questions about your effective tax rate, please contact our office. We are happy to help you know adjust your W-4 so that you do not owe on your 2019 tax return.