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Wage Withholding Considerations: Assessing & Adjusting Your Form W-4 Allowances

With the changes in tax rates that were implemented at the start of 2018 as per the Tax Cuts and Jobs Act (TCJA), individual taxpayers may find themselves either over- or under-withholding on their wages in 2018. The IRS responded quickly to the new tax law by issuing new withholding tables, and a new Form W-4, Employee’s Withholding Allowance Certificate—which most employers implemented by February 15, 2018. In addition to the changes in tax rates, the new withholding tables for 2018 also contemplate the increased standard deduction, and the suspension of personal exemptions.

If you did not determine, earlier in the year, whether your withholding allowances are sufficient, now would be a good time to do a year-end projection to check your W-4 withholding allowances and verify whether they might require adjustment, or whether you should make a fourth quarter estimated payment by January 15th to cover the shortfall. This change holds more importance this year than in other tax years, as 2018 is the first year in which most of the new tax law provisions will be implemented. Individuals who fall into any of the following categories should pay especially close attention to verify their W-4 withholding allowances:

• Those who belong to a two-income family
• Those who work two or more jobs, or only work for part of the year
• Those who have children and claim credits such as the Child Tax Credit
• Those who have older dependents, including children age 17 or older
• Those who itemized deductions on their prior year tax returns
• Those who earn high incomes and have more complex tax returns
• Those who received large tax refunds or had large tax bills for the prior year

The IRS offers a Withholding Calculator tool to help determine whether you need to make adjustments to your withholdings by filing a new Form W-4. The goal should be to ensure that your withholding for the year is as close as possible to your projected tax liability for 2018. If it appears that your year-to-date withholding will not cover your projected tax liability for 2018, it is suggested that you correct your 2019 withholding by completing a new form W-4 if needed. This consideration should also include any nonwage or investment income where tax has not been withheld and where estimated tax payments have not been made. This is an important planning approach to help you avoid any potential late payment penalties if you have not paid in 90% of your current year tax shown on your return, or 100% of the tax shown on your prior year tax return (110% for individuals who showed a prior year adjusted gross income amount of $150,000 or more).

On the other hand, if it appears that you have overpaid your projected 2018 tax liability through your year-to-date withholdings, it is recommended that you file a new Form W-4 with your employer to decrease withholding and get a refund upfront, as opposed to giving the IRS an interest-free loan.

It is important to note that this blog focuses on federal tax withholding considerations; your state and local jurisdiction(s) will more than likely have withholding requirements as well that should be considered. It is always our recommendation that you speak with your trusted tax advisor for planning related to your state and local withholding allowances. Here at FF&F, we will continue to provide updates regarding relevant changes to TCJA and how they might affect you specifically. We encourage you to contact us with any questions you may have related to your estimated taxes or other tax matters. For such inquiries, or for information about our services, please contact us at info@fffcpas.com or (212) 245-5900.

Deven M. Conner, CPA, EA is a Senior tax professional with FF&F. He is an IRS Enrolled Agent and has over 11 years of combined tax and public accounting experience comprised of family office groups, private equity firms, and forensic accounting. Deven has a strong background in individual, fiduciary, and partnership taxation. His diversified experience in the private and public sectors, which include a Big Four firm and top mid-size public accounting firm, serves as a solid foundation for his unique and comprehensive understanding of taxation.