Three Reasons Your Withholding Could be Wrong After the Tax Changes

At the beginning of 2018, the IRS announced that it will not require employees to submit a new W-4 to adjust their withholding for the new tax law. Instead, the IRS sent out new tables so that employers can automatically calculate new withholding amounts. While this will get your withholding right in most scenarios, there are a few situations where it could be too high or too low.

Fewer Itemized Deductions

Several common itemized deductions are no longer available. The most popular recurring ones include the following.

  • Home equity loan interest.
  • State and local taxes ($10,000 cap instead of unlimited).
  • Unreimbursed employee expenses.
  • Tax preparation fees.
  • Donations for college athletic tickets.
  • Other miscellaneous itemized deductions.

The increased standard deduction was intended to replace these deductions. However, some taxpayers who had high itemized deductions in recent years may lose more in itemized deductions than the standard deduction added back.

Your withholding may be too low if you previously increased your W-4 allowances to have less tax withheld because of your high itemized deductions.

Bigger Standard Deduction

If you’ve always used the standard deduction, you likely won’t need to adjust your withholding. Since the standard deduction is standard, the withholding tables easily show the correct amount for most people.

There are still a couple of scenarios where your withholding could be too high or too low.

  • You’ll use the new standard deduction instead of itemized deductions as discussed above.
  • You previously reduced your allowances because you always got a large refund.
  • You previously increased your allowances to cover for other income such as from investments or a side job.

Business Tax Changes

Business tax changes could impact your estimated tax payments or your withholding if you changed your day job allowances to cover your side job taxes.

The biggest change on this front is the 20-percent pass-through deduction. In short, most Schedule C filers and S-corporation owners will only pay tax on 80 percent of their business income. This means that if you expect the same business income each year, your estimated tax payments or withholding probably won’t need to be as high this year.

The IRS said you don’t need to adjust your withholding, but it’s still a good idea to do so. Taking the time now to find out how the tax changes affect you may help you avoid a surprise bill next year or let you increase your take-home pay now.

Leave Comments

Free eBook

Tax Settlement Options

Download Now
Having a tax debt is stressful. We can help.