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Fed Facts: New Tax Rules*
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By Amy Johnson, FEIAA Board Member (P406)

Employees should check their withholding at the beginning of each year or when their personal circumstances change. It’s important for people to review whether they’re having the right amount of tax withheld from their paychecks. The new Tax Cuts and Jobs Act may dramatically change many individuals’ tax bills in 2018, which they may not appreciate until they file their return in 2019. Following its enactment, the IRS released a revised Form W-4 but noted that employees would not have to submit a new form if they believed that the current withholding was appropriate. Nonetheless, the IRS has encouraged employees to do a “paycheck checkup” so that they have the right amount of taxes withheld. The IRS has also created a Withholding Calculator to figure out whether changes to withholding are needed.

With the significant changes in the tax code for 2018, employees may want to ensure that their current withholding is appropriate. With the new tax law, it’s especially important for employees to check their withholding to ensure they are not being under- or over-withheld. The new law increased the standard deduction, removed personal exemptions, increased the child tax credit, limited or discontinued certain deductions, and changed the tax rates and brackets.

The IRS specifically recommends that employees in the following groups check their withholding:

  • Two-income families
  • Employees with two or more concurrent jobs or who work only for part of the year
  • Employees with children who claim credits such as the child tax credit
  • Employees who itemized deductions in 2017
  • Employees with high incomes and more complex tax returns
  • Employees who utilize the two-earner/multiple jobs worksheet

The IRS emphasizes the new tax law changes make it especially important for specific groups of taxpayers to visit the Withholding Calculator on IRS.gov. This year, it’s even more urgent for people to review their situation following the new tax law changes. As people complete their 2018 tax returns, this is a perfect time to do a paycheck checkup.

The IRS unveiled several new features to help taxpayers understand the implications of the new Tax Cuts and Jobs Act and navigate the complex issues affecting withholding. During the Paycheck Checkup campaign, the IRS is highlighting these efforts, including through new YouTube videos and a special tax tip series.

The centerpiece of the effort is the updated Withholding Calculator on IRS.gov. The new tax law could affect how much tax employees should have their employer withhold from their paycheck. Using the Withholding Calculator can help prevent employees from having too little or too much tax withheld.

Having too little tax withheld can mean an unexpected tax bill or potentially a penalty at tax time in 2019. And with the average refund topping $2,800, some taxpayers might prefer to have less tax withheld up front and receive more in their paychecks.

Taxpayers can use the Withholding Calculator to estimate their 2018 income tax. The Withholding Calculator compares that estimate to taxpayers’ current tax withholding and can help them decide if they need to change their withholding by submitting a new Form W-4 to their employer. When using the calculator, it’s helpful to have a completed 2017 tax return available.

Changes in personal circumstances

When an employee’s personal circumstances change, it may warrant additional or fewer withholding allowances to change the amount of income taxes withheld from pay. Such changes include the following:

  • Marriage, divorce, or death of a spouse. A change in marital status changes the tax filing status for an employee, which in turn impacts tax rates, standard deductions, and other tax breaks.
  • Having or adopting a baby. A new child in the family may, for example, entitle an employee to the child tax credit, earned income tax credit, and dependent care credit. These breaks can significantly reduce an individual’s tax bill.
  • A spouse entering or leaving the workforce. An employee’s withholding may be influenced by the withholding on a spouse’s pay. If a spouse starts or leaves a job, an employee’s withholding can be adjusted to cover the tax bill for the couple. If a spouse runs a business, the employee may want to adjust withholding to cover the taxes attributable to the spouse’s business so that paying estimated taxes is not necessary.

When a change in circumstances reduces the number of withholding allowances (i.e., requires increased withholding), the employee must submit a revised Form W-4 showing the correct number of withholding allowances within 10 days of the change. But if the reduction in withholding allowances is because of the Tax Cuts and Jobs Act, no new form is mandated for this year.

For employees, withholding is the amount of Federal income tax withheld from their paycheck. The amount of income tax an employer withholds from an employee’s regular pay depends on two things:

  • The amount the employee earns
  • The information the employee provides on Form W-4
Need to change the amount of tax withheld

Taxpayers who need to change the amount of tax withheld from their paychecks need to complete Form W-4 and give it to their employer. Some employers allow employees to submit a W-4 electronically. Employees need to take this step whenever they determine they need to have more—or less—tax withheld. This can be determined by using the Withholding Calculator, the worksheets on Form W-4, Tax Withholding and Estimated Tax Information Booklet - Publication 505, or consulting a tax advisor.   

For more information about these topics and more, go to https://www.irs.gov/, https://www.opm.gov/, and https://www.gsa.gov/.

*All information contained in this article is from the Internal Revenue Service [IRS], Office of Personnel Management, and General Services Administration official websites.

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