Please Check Your 2019 Withholding
March 5, 2019
By Matthew E. Miller, CPA, MBA
We are a couple of weeks into what is sure to be a stress filled tax filing season for taxpayers. Buckle up and hang in there, it’s going to be a bumpy ride. We’ll do our best to help by offering tips and suggestions.
In early February, news agencies were reporting that early filers were upset with the new tax bill because ‘taxpayers are experiencing “smaller than expected refunds” ‘. When I first heard some of these news reports admittedly, I was irritated. Not for the statement ‘taxpayers are experiencing “smaller than expected refunds”’, but for the news reports not explaining why taxpayers were receiving smaller than expected refunds.
By late February, the news stories regarding negative tax outcomes were increasing, but still lacked an explanation of why.
Now that we are a month into tax season, I can tell you there is a pattern emerging. Taxpayers are receiving surprises. Not only are some taxpayer’s refunds smaller than expected, many taxpayers (interpret most) are making payments to the federal government.
From our observations of the tax returns we have completed, here is what I can tell you about the 2017 Tax Cuts and Jobs Bill (a generalization) –
- Taxpayers are realizing lower tax rates in 2018 than in 2017. Even with the cap on state and local taxes and the elimination of personal exemptions, tax rates are down in 2018 by a point or two.
- As a result of the revision of the tax withholding tables in February 2018, taxpayers had less tax withheld from their paycheck or retirement pay. In some instances, the decrease in withholding is significant.
The decrease in withholding from #2 above was greater than the decrease in tax rates from #1 above. The result is many taxpayers are writing checks to Uncle Sam.
You may recall our newsletter “Federal Tax Payments” from June 2018. We laid out for you how to calculate if your withholding is sufficient to cover your projected 2018 tax liability. While most of you read the article (we had a 72% Open Rate), we may have failed to fully explain the importance of monitoring your withholding throughout the year.
We are all participants in a “pay as you go” or “pay as you earn” income tax system. The government expects that we pay our taxes as we earn our income. For most of us, tax payments are made to the government through taxes withheld from our paycheck. Our employer then remits our withheld taxes to the government.
Truth be told, there are defects in the withholding process, mostly attributable to the withholding tables. Combine the fact that the withholding tables have assumption defects with the fact that taxpayers occasionally complete their W-4 incorrectly, the result will be a withholding shortfall.
Check Your Withholding
While there are a number of tools available to taxpayers to check their withholding (See below), allow us to simplify the calculation. With your tax return we will prepare a tax summary that will identify for you your effective tax rate. Your effective tax rate is the percentage of tax that you pay on your income after your deductions. The manual calculation is simple, just divide your total tax liability by your taxable income. The result is your effective tax rate.
The next step is to determine whether your rate of withholding is equal to your effective tax rate. To do so, look at your last paycheck. Divide your YTD federal tax withholding by your YTD taxable wages. The result will be your federal tax withholding percentage. If your withholding percentage is less than your effective tax rate, you’re under withheld. The fix is simple. You have two options, one is to decrease your exemptions on your W-4 statement so your employer withholds more tax, or two, you can remit the under withholding by filing quarterly estimated payments. Either method will work.
Please remember, if you have other sources of income that does not have withholding tax, ie interest, dividend, capital gains, you need to be sure to account for this income when determining your withholding or estimated tax payments.
Also, don’t forget to check your state withholding. The steps are the same as for your federal return. State tax liability divided by state taxable income equals state effective tax rate. Make the calculation from your paystub to check your state effective withholding rate. If you have a deficiency in your state withholding, change your state W-4 or pay quarterly estimates.
We Are Here as a Resource
If you have made your calculations from above and have determined your withholding is deficient to meet your projected tax liability and your concerned on what to do, we are happy to assist you. Please reach out.