With the recent Tax Cuts and Jobs Act (TCJA) that was passed back in November of 2017, we’ve been dedicated to covering every available aspect of the new tax law as the information becomes available. Today’s topic? The small, but crucial changes to the rules of withholding, and why you should now always double-check your payroll to avoid possible blowback from the IRS.
As the first, clear TCJA change explained by the IRS, everyone is excited that the tax rate for Individuals has been lowered – many reasoning that they’re likely over-withholding now with their income tax.
However, what is easily missed by many taxpayers, is the accompanying fine print of similar alterations that comes with that lowered tax rate – these changes holding the potential for you to actually under-withhold!
What’s Changed
To make sure the correct amount of income tax is being withheld, here’s what provisions are different and how they could potentially apply to you:
● The standard itemized deduction threshold has now nearly doubled to $12,000 for single filers, and $24,000 for spouses filing jointly.
● The Child Tax Credit (CTC) has also doubled from $1,000 to $2,000, while $1,400 can be refunded. However, there is now a $500 credit for dependents who aren’t your children, that cannot be refunded.
● Personal exemptions – even for dependents and qualifying relatives – no longer apply.
● The State and Local Tax (SALT) deduction – including that for sales tax, local income tax, and both state and local property tax – is now reduced to $10,000 per year.
● The mortgage interest deduction has also been lowered – with the new acquisition deduction set at interest paid for the first $750,000, while the deduction for interest paid on home equity debt is all but nonexistent.
● All miscellaneous expense deductions have been eliminated, including those for unreimbursed employee business expenses and tax and investment advisory fees.
What This Means
For taxpayers who traditionally itemize their deductions, especially those in high-tax states like New York and California, you’ll likely see a significant drop in tax benefits due to the loss of personal exemptions and SALT deductions. To necessarily increase their withholding to make up for the difference, many may also opt for the standard deduction this year. For others, the doubled CTC and standard deduction may cause them to unknowingly over-withhold.
Our advice? Talk with your tax professional and double-check your payroll withholding to make sure you’re on the right side of things. To help you crunch the numbers, the IRS provides a handy calculator, but it’s admittedly a long and difficult process to gather the necessary information and discerning variables.
Should you ever want us to do the heavy lifting for you, feel free to call us at (310) 534-5577 or email [email protected] anytime. We at AB&P are always ready to serve you – from explaining the perks of the TCJA, to personally handling your books and taxes.
