It’s my annual Taxes from A to Z series! This time, it’s Tax Cuts and Jobs Act (TCJA) style. If you’re wondering whether you can claim house office expenses or whether to deduct a capital loss under the new law, you won’t want to miss a single letter.
W is for Withholding.
Outside of the pass-through and SALT deductions, withholding is probably the most talked about provision for individual taxpayers under the TCJA.
We have a pay-as-you-go system which means that taxpayers typically pay their taxes during the tax year through a combination of withholding and estimated payments made in four installments.
How much your employer will withhold from your paycheck and remit to the government on your behalf is determined by your form W-4. You typically complete a form W-4 each year (or if you change employers or experience a significant life event) and give it to your employer – not the Internal Revenue Service (IRS). Your employer then uses tables from the IRS to determine how much to take out of your check and remit to the IRS on your behalf. Your employer will report that amount to the IRS each year using a form W-2. Specifically, Box 2 on your W-2 reports the total amount of federal income taxes withheld from your pay during the year.
(You can find out more about form W-2 here.)
Usually, that’s all there is to it. You reconcile what you paid through a combination of withholding and estimated payments when you do your taxes. If you paid in too much, you’ll get a refund. If you paid in too little, you’ll write a check. In most cases, if you don’t pay—through that—at least 90% of the tax that you owe or 100% of the tax that you owed in the prior year (the percentage is 110% if your adjusted gross income on that return was at least $150,000), you may owe a penalty. Exceptions and waiver provisions apply, and there’s generally no penalty if you owe less than $1,000 in tax.
But here’s where things got tricky in 2018. The TCJA introduced a number of changes, including caps on state and local tax deductions, a zeroed-out personal exemption amount, and the elimination of reimbursed job expenses. Additionally, the TCJA wasn’t passed until the end of 2017, new withholding tables were not available to employers until mid-January of 2018, and some employees didn’t see a switch in withholding until mid-February of 2018.
The result was confusing, with many taxpayers not withholding enough for 2018 which would mean they would be subject to a penalty. In response, some leading some tax professionals, including the American Institute of CPAs (AICPA), called on the IRS to make some changes to the penalty structure. (You can read the letter from the AICPA, which downloads as a pdf, here.)
In January of 2019, the IRS advised that they would waive underpayment penalties so long as withholding and estimated tax payments total at least 85% of the tax shown on the return for the 2018 taxable year. Two months later, in March, the IRS expanded the relief for those taxpayers making payments of at least 80% of the tax shown on the return for the 2018 taxable year.
That’s good news for many taxpayers, but don’t be short-sighted. If you didn’t withhold enough, you’ll want to make some changes on your form W-4 for 2019. IRS Commissioner Chuck Rettig has said, “We urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.” (For more on form W-4, click here.)
For more Taxes From A To ZTM 2019, check out the rest of the series:
- A is for Alimony
- B is for Bracket Creep
- C is for Credit For The Elderly Or The Disabled
- D is for Due Dates
- E is for Earned Income Tax Credit (EITC)
- F is for Fair Debt Collection Practices Act (FDCPA)
- G is for Gross Estate
- H is for Home Office Deduction
- I is for Innocent Spouse
- J is for Jackpot
- K is for Kiddie Tax
- L is for Long-Term Capital Gains or Losses
- M is for Medical Expenses
- N is for Notice
- O is for Opportunity Zone
- P is for Pass-Through Deduction
- Q is for Qualified Business Income
- R is for Real Estate Investment Trust
- S is for Security Deposit
- T is for Trust Fund Taxes
- U is for Unadjusted Basis
- V is for VITA