For a majority of taxpayers, the 2018 tax season has come to an end. Did you owe more money to the IRS for 2018 than you expected? If so, it might be because you withheld too little in payroll taxes from your regular paychecks in 2018. Why is that the case?
One of the main features of The Tax Cuts and Jobs Act was a reduction in the number of income tax brackets that was designed to lower the taxes for most tax payers. To account for the expected lower taxable income, the IRS reduced the amount of tax that was withheld from your paycheck starting in late February of 2018.
The Tax Policy Center estimated that two-thirds of American household would pay less under the tax law, 9% or so would pay less, and the rest would experience no changes. However, these estimates assumed that tax payers would make the proper adjustments in their tax withholding to account for the loss of exemptions and deductions that were eliminated under the new tax law.
A family of four in 2017 would have received $4,050 exemption for each family member. That meant your taxable income was reduced by $16,200. However, in 2018 a tax exemption for each family member was eliminated.
To offset the impact of the lost exemptions, in 2018, the standard deduction was increased to $12,000 for single filers and $24,000 for married couples. For those households who claim the standard deduction this was a big boost. In addition, the child tax credit was increased to $2,000 per dependent child under 17. The income threshold to qualify for the deduction was increased to $200,000 for single filers and $400,000 for married couples. Prior to the new tax law, only single filers with income below $75,000 and married couples with income below $55,000 could qualify for the child tax credit.
For higher income families, these adjustments may not have been adequate to offset the loss of certain deductions. Households who were accustomed to claiming more than the standard deduction – “itemizing deductions”, are now limited by a number of restrictions. First, there is now a $10,000 deduction limit in the amount of state income tax, real estate tax, and personal property tax payments that can be taken. This limitation had a significant impact on high income earners and homeowners in states like California and New York as these items represented a bulk of the itemized deductions. People who purchased a home after December 2017 also was limited in the amount of mortgage interest that they could deduct to the first $750,000 of the mortgage loan. Again, this change Impacted people in states with high real estate costs like California. Household also could no longer deduct the interest that was paid on Home Equity Lines of Credits unless that loan was directly related home improvement costs.
If you paid more in taxes in 2018, your situation in 2019 could be worse if your payroll tax withholding is not increased. That is because you will have 12 full months of reduced payroll tax withholding. To change your Federal payroll tax withholding you will need to fill out a new W-4 form. Your employer can provide that to you or you can go directly to the IRS Website. By simply following the directions, the form will guide you through the appropriate number of allowances that is appropriate for you. The more allowances you have, the less tax is withheld from your paycheck and vice versa. The result that is calculated is designed to apply to the average household with non-complex tax issues.
However, if you are a high-income earner, both spouses work, have additional income from investments or other sources, itemize your deductions, and own a home, it is important that you go through the additional Deductions and two-earner worksheet to accurately determine the appropriate withholding. If you are still unsure of the appropriate withholding for your household, I recommend speaking to a tax professional.