If you receive a paycheck with tax withholding calculated, you may be in for a surprise this year.
The Tax Cuts and Jobs Act of 2017 made a number of significant changes to the federal tax code for personal tax returns. These changes are effective for 2018 – 2025 , after which the previous tax code applies. The most significant changes include:
- No personal exemptions.
- Itemized Deduction changes. The most significant changes are :
- State and local taxes are limited to $10,000.
- There are no more Miscellaneous deductions.
- The non-deductible ‘floor’ for medical deductions was reduced from 10% to 7.5% for 2017 and 2018 only. The floor returns to 10% in 2019.
- The Standard Deduction has increased to $24,000 for married filing jointly ($12,000 for single filing).
- The tax bracket rates have been reduced.
- The Alternative Minimum Tax (AMT) exemption increased.
- Child tax credit increase from a maximum of $1000 to $2000 per child.
Many people will find their 2018 tax bill either a little higher or a little lower than 2017, assuming a similar income for those years. Whether or not your federal tax bill will increase, or decrease, depends on your particular circumstances.
Withholding Calculation has Changed
Due to the above situation you may think that you can leave your W4 withholding elections for your paycheck unchanged. This is likely to be a mistake since the federal withholding calculation algorithm has changed for 2018. If you leave your elections unchanged, you may find that you have under withheld, resulting in taxes due and penalties in April 2019.
The federal tax withholding calculation has changed for 2018. Without submitting an updated W4 Employee’s Withholding Allowance Certificate, you may end up under withholding, resulting in taxes due and penalties in April 2019.
To resolve this problem before April, consult with your tax professional for a tax planning session. An optimum time for this would be September or October. Your tax professional can then advise you on whether you need to pay estimated taxes to make up the difference, and whether or not to change your W4 elections going forward.