Reviewing Your Form W-4 After TCJA
By Jeremy Rodriguez, JD
With the tax deadline having just passed, now is the perfect opportunity to start planning for next year. Last year’s return should be readily available, and you may even have many important items committed to memory. Additionally, four months into the year is the perfect time to begin making current year projections. Of course, this year is different. That’s because 2018 will be the first we file under the changes created by the Tax Cuts and Jobs Act (TCJA).
One thing you should do is reexamine your withholding. Back in February, the IRS released an updated withholding calculator that reflects changes under the new tax law. You can find the new withholding calculator here (https://apps.irs.gov/app/withholdingcalculator). The great thing about using the calculator is that you won’t have to deal with the new W-4 worksheets. The IRS specifically encourages taxpayers who fall into the following groups to double-check their withholding:
1. Two-income families;
2. Taxpayers with two or more jobs at the same time or who only work for part of the year;
3. Taxpayers with children who claim credits such as the Child Tax Credit;
4. Taxpayers who itemized deductions in 2017; and
5. High income taxpayers and those with complex returns
To use the calculator, you’ll need your most recent pay stub (and your spouse’s, if applicable). Don’t bother starting if you don’t have this information; it’s practically impossible without it. You should also have a copy of your 2017 tax return. While not completely necessary, it will help you more accurately estimate potential deductions and credits. Finally, any other sources of income you expect to receive, along with anticipated deductions, should be factored in. Remember, underestimating your income can lead to a tax bill at the end of the year, so you want to be accurate.
The website will immediately ask you for your filing status and whether you can be claimed as a dependent. After that, you’ll indicate whether you expect to claim any credits for 2018, such as the Child and Dependent Care Credit or the Child Tax Credit. Remember, TCJA enacted major changes to the Child Tax Credit, including doubling the amount (i.e., $2,000 per qualifying child), increasing its refundable portion, and dramatically increasing the phase-out thresholds. In 2018, the credit does not begin to phase-out until adjusted gross income reaches $200,000 for a single filer and $400,000 for married couples filing jointly; compare that to 2017, where the credit began to disappear for married couples that earned more than $110,000! TCJA also added a commonly overlooked $500 non-child dependent credit to help offset the loss of the personal exemption. The calculator automatically calculates this credit based on your information.
In the next section, you’ll enter your expected wages and bonuses for 2018. This is the part where the current paystub becomes essential. In addition to wages, you’ll include your projected yearly contributions to any tax-deferred retirement plan, such as a 401(k) or 403(b) plan and any pre-tax cafeteria plan (e.g., any health insurance or flexible spending account plan). Find the amount you contribute per pay period and multiply it by the number of pay periods in a year. Your payroll statement may have year-to-date information making this task much easier. Finally, enter the total federal income tax withheld from your pay this year and the rate withheld per pay period. For this step, do not include Social Security, Medicare, state, or local withholding.
The last section will ask about estimated itemized deductions. This is where a copy of your 2017 return will come in handy. The calculator takes into account the increased standard deduction for 2018 ($12,000 for individual and $24,000 for married couples filing jointly). Therefore, it will use the larger of the two numbers (i.e., estimated itemized deductions vs. standard deduction) to estimate your taxes. Once all this information is entered, the website will give you the following information:
1. Your anticipated 2018 income tax;
2. The amount that will be withheld if you do nothing, and whether you will receive a bill or a refund on that basis;
3. A withholding adjustment you can make to come closer to your anticipated 2018 income tax; and
4. The amount of any refund or payment expected if the recommended changes are adopted.
With the new tax law kicking in, it’s likely that your taxes will be much different next year. Thus, it’s better to plan now than wait for a surprise next April. In fact, you may be able to adjust your withholding and take home additional pay immediately! All it takes is delivering an updated Form W-4 to your human resources or payroll department.