People are feeling the impact of the new tax laws imposed by the Tax Cuts and Jobs Act (TCJA) during this first tax filing season since its implementation in December, 2017. We are seeing frustration when clients learn that their refund is less than before, or that they actually owe money for the first time.
For many, the impact of the changed tax laws, coupled with the updated federal tax withholding tables created a challenge in understanding and accounting for their tax liability.
What Do You Mean I Owe a Penalty?
Adding insult to injury, some taxpayers are now faced with penalties for the underpayment of estimated taxes. These taxpayers were simply unaware they needed to make an estimated tax payment, or ask their employer to withhold more from their paychecks.
As soon as the TCJA became effective, the IRS was asked to reflect the TCJA’s changes in the withholding tables to “allow taxpayers to begin seeing the changes in their paychecks as early as February [2018]” (IRS, IRS Statements — Withholding for 2018, Dec. 26, 2017). In other words, the IRS was asked to adjust the withholding tables to reflect an “accurate” tax liability. However, taxpayers don’t realize that accurate means more closely matching their withholding to their tax liability, which results in near zero refunds.
More importantly, TCJA provisions affect taxpayers differently. Some families actually have a higher tax liability in 2018. The adjusted withholding tables could not accurately account for all of the aspects, including the elimination of the personal and dependency exemptions or reduced itemized deductions.
I Didn’t Change My Withholdings Because They’ve Always Been Plenty!
While the IRS started a “Paycheck Checkup” campaign for taxpayers to check their withholdings using the new calculator, a taxpayer would need some understanding of taxes and the different income types. This is knowledge many taxpayers don’t have. Additionally, news of the IRS’s Paycheck Checkup plan typically reached only taxpayers and practitioners who closely followed IRS news releases.
Further, since the withholding tables are based on the TCJA’s changes and many taxpayers will pay less tax under the TCJA, it is reasonable to assume that wage earners relying on their wage withholding should not have to worry that they paid in at least 85% of the current year’s tax liability to avoid penalties — especially when their withholdings have been sufficient to cover their tax liability in the past.
So, while taxpayers are ultimately responsible for understanding and paying their tax obligations, many faced uncertainties in determining the amount of their actual 2018 liability.
Moral of the story…prepare now for next year!