Is that extra money in your paycheck going to come back and bite you when you file your taxes?
While we know on a logical level that we should aim to break even or pay a small amount of taxes each spring, we can’t deny there is a bit of glee when we find out we are getting a refund. In fact, many people plan on it each year, using that money to pay off bills or to fund the annual family vacation. It feels like found money, even though we know it is our own money that we’ve paid through paycheck withholding.
This year is likely to be a bit different, and in some cases, shocking. A decent percentage of people are under-withholding and will have to pay taxes on April 15. Some are so far off that they may have to pay an underpayment penalty in addition to their taxes. So how did this happen?
The Tax Cuts and Jobs Act passed earlier this year brought about a great number of changes to our tax law. While the standard deduction and child credit went up, the mortgage interest deduction went down, and the personal exemptions went away. All of these changes, and myriad more, meant the withholding form that you file with your employer was outdated.
Instead of taking the time or making the effort to get everyone to provide updated information, the IRS created a new withholding schedule as best it could and told employers to use it going forward. They then encouraged employees to enter their information into its withholding calculator to confirm that their withholding was still in range and not woefully low. The thing is that this news was not widely disseminated, and most people had no idea they should do this paycheck check-up.
Which brings us to today. The IRS Information Reporting Advisory Committee recently released a report that says that the decision to implement the new withholding schedule without allowing employers to collect updated information “may cause a significant number of taxpayers to be under-withheld when they file their 2018 personal income tax returns.” They are so concerned, in fact, that the committee recommended that there IRS waive penalties for under-withholding this year. There has not been an official decision on this from the IRS as of this posting.
The IRS has put together information on who is most likely to be impacted by this under-withholding in this article, and we recommend everyone take a look and use the calculator to determine if you are at risk. If you are, you may want to increase the withholding amount in your last couple of 2018 paychecks or start saving money to cover your tax bill in April. If you have any questions or want help on this topic, reach out right away so we can do what we can before the end of the year.