Now that the April 15 the federal tax filing date has passed most of us (reluctantly) turn at least some of our thoughts to the Internal Revenue Service and the tax code. The IRS has done the same thing; on April 15, 2019, it announced that its withholding forms for 2019 will remain the same as 2018, but expects to revise the form and guidance for 2019.
Many taxpayers were unpleasantly surprised this year when they prepared their tax filings, either because they received an unexpectedly low refund, or because they had to make a payment instead of a refund. The IRS reports that increasing numbers of taxpayers are becoming subject to estimated tax penalties for underpaying their taxes during the year. The number of people who paid this penalty jumped from 7.2 million in 2010 to 10 million in 2017, an increase of nearly 40 percent. The penalty amount varies, but can be several hundred dollars.
2018 Penalty Relief
The IRS is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year. The penalty will generally be waived for any taxpayer who paid at least 80 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. The usual percentage threshold is 90 percent to avoid a penalty.
The waiver computation is normally reflected in commercially available tax software and in the latest version of Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, and its instructions. This relief is designed to help taxpayers who were unable to properly adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act.
The updated federal tax withholding tables, released in early 2018, had largely reflected the lower tax rates and the increased standard deduction brought about by the new law. This generally meant taxpayers had less tax withheld in 2018 and saw more in their paychecks. However, the withholding tables couldn’t fully factor in other changes, such as the suspension of dependency exemptions and reduced itemized deductions. As a result, some taxpayers could have paid too little tax during the year, if they did not submit a properly-revised W-4 withholding form to their employer or increase their estimated tax payments.
One way to avoid surprises next April is to update the amount withheld throughout the year by submitting a new W-4 form. Employees indirectly control how much of their expected tax bill will be paid in paycheck increments by the way they fill out their W-4. Although revising the W-4 won’t reduce the ultimate tax bill, it reduces the risk of under withholding of tax penalties. The IRS recommends that employees should check their withholding amount at the beginning of each year or when their personal circumstances change.
Form W-4 includes four types of information that an employer will use to figure your withholding amount.
- Whether to withhold at the single rate or at the lower married rate.
- How many withholding allowances are claimed (each allowance reduces the amount withheld.)
- Whether an employee wants an additional amount withheld.
- Whether an employee is claiming an exemption from withholding.
By law, an estimated tax penalty usually applies when a taxpayer pays too little of their total tax during the year. The penalty is calculated based on the interest rate charged by the IRS on unpaid tax. For most people, avoiding the penalty means ensuring that at least 90 percent of their total tax liability is paid during the year, either through income tax withholding or by making quarterly estimated tax payments. Exceptions to the penalty or special rules apply to some groups of taxpayers, such as farmers, fishers, casualty and disaster victims, those who recently became disabled, recent retirees, those who base their payments on last year’s tax and those who receive income unevenly throughout the year.
If an employee qualifies, he or she can also use Form W-4 to declare an exemption from any federal income tax deduction from his or her wages. To qualify for this exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. Form W-4 claiming exemption from withholding is valid for only the calendar year in which it is filed with the employer and must be filed by February 15 of that year.
Pension Withholding and Retirees Returning to the Workforce
When first receiving pension, it is necessary to tell the payer how much tax to withhold, if any, by completing Form W-4P, Withholding Certificate for Pension or Annuity Payments (or similar form).
However, if retirement pay is from the military or certain deferred compensation plans, you complete Form W-4 instead of Form W-4P.
If a retiree returns to the workforce, the new Form W-4 (given to the new employer) and your Form W-4 or W-4P (on file with your pension plan) must work together to determine the correct amount of withholding for your new amount of income.
Changes in the Tax Law To Consider
It is even more important for people to do a “paycheck checkup” following changes from the Tax Cuts and Jobs Act. In 2018, the IRS revised the Form W-4 worksheets and the Withholding Calculator to reflect the new law more fully and provide employees information to determine whether they need to adjust their withholding. Employees should use the Withholding Calculator to check if they need to adjust their withholding. If they need to fill out a new Form W-4, they should do so and give it to their employers as soon as possible.
The Tax Cuts and Jobs Act did not simply change tax rates; it reconfigured who bears the federal tax burden. Among the key changes were the suspension of the personal exemption deduction, but the increase of the child tax credit. For 2018, the maximum credit was increased to $2,000 per qualifying child. The maximum additional child tax credit is increased to $1,400. In addition, the income threshold at which the credit begins to phase out is increased to $200,000 ($400,000 if married filing jointly). In addition, a new credit of up to $500 is available for each dependent who does not qualify for the child tax credit. This may be useable for dependent teenagers above the age of seventeen or parents supported by their adult offspring. The maximum income threshold at which both the child and other dependent deduction credit begins to phase out is increased to $200,000 ($400,000 if married filing jointly).
Changes to Itemized Deductions
In 2018, the following changes were made to itemized deductions that can be claimed on Schedule A. Itemized deductions are no longer limited by the amount of adjusted gross income. You can deduct the part of your medical and dental expenses that is more than 7.5% of your adjusted gross income. The deduction for state and local income, sales, and property taxes is limited to a combined, total deduction of $10,000 ($5,000 if married filing separately). This cap is particularly burdensome on residents of states such as New Jersey which have high real estate prices and correspondingly high real estate taxes, in addition to state income taxes. Furthermore, for indebtedness incurred after December 15, 2017, the deduction for home mortgage interest is limited to interest on up to $750,000 of home acquisition indebtedness. This new limit doesn’t apply if you had a binding contract to close on a home after December 15, 2017, and closed on or before April 1, 2018, and the prior limit would apply. It is no longer possible to deduct interest on home equity indebtedness, which means indebtedness not incurred for the purpose of buying, building, or substantially improving the qualified residence secured by the indebtedness.
The job-related expenses or other miscellaneous itemized deductions that were available once they were equal to 2% of Adjusted Gross Income are eliminated. However, the limit on charitable contributions of cash has increased from 50% to 60% of your adjusted gross income. For more information, see the Instructions for Schedule A.
Changes to Deduction for Qualified Business Income
For tax years beginning after December 31, 2017, taxpayers other than corporations are entitled to a deduction of up to 20% of their qualified business income from a qualified trade or business.
The deduction is subject to multiple limitations based on the type of trade or business, the taxpayer’s taxable income, the amount of Form W-2 wages paid with respect to the qualified trade or business, and the unadjusted basis of qualified property held by the trade or business. The deduction can be taken in addition to the standard or itemized deductions. For more information, see Code section 199A.
Alternative Minimum Tax Exemption Amount Has Been Increased
The AMT exemption amount increased to $70,300 ($109,400 if married filing jointly or qualifying widow(er); $54,700 if married filing separately). The income level at which the AMT exemption begins to phase out has increased to $500,000 ($1,000,000 if married filing jointly).
Standard Deduction Amount Increased
For 2018, the standard deduction amount has been increased for all filers, and the amounts are as follows:
- Single or Married Filing Separately—$12,000.
- Married Filing Jointly or Qualifying Widow(er)—$24,000.
- Head of Household—$18,000.
New Standards for the Earned Income Credit (Eic): 2018
You may have been able to take the EIC in 2018 if:
Three or more children lived with you:
- and you earned less than $49,194 ($54,884 if married filing jointly),
- Two children lived with you and you earned less than $45,802 ($51,492 if married filing jointly),
- One child lived with you and you earned less than $40,320 ($46,010 if married filing jointly), or
- A child didn’t live with you and you earned less than $15,270 ($20,950 if married filing jointly).
Also, the maximum adjusted gross income you can have and still get credit has increased. You may be able to take the credit if your Adjusted Gross Income is less than the amount in the above list that applies to you. The maximum investment income you can have and get the credit is $3,500 for 2018.
With all these changes, therefore, there are some people for whom the calculation of the optimum withholding is more complicated.
Those who live in two income families, have multiple jobs, receive retirement income, as well as income from a current job, have significant income (such as interest on investments) outside of employment may find the calculation of withholding, particularly the amount of allowances to seek more complex.
The tax year 2019 Earned income and adjusted gross income (AGI) must each be less than:
|Qualifying Children Claimed|
|If filling:||Zero||One||Two||Three or More|
|Single, Head of Household or Widowed||$15,570||$41,094||$46,703||$50,162|
|Married Filing Jointly||$21,370||$46,884||$52,493||$55,952|
Investment Income Limit
Investment income must be $3,600 or less for the year.
Maximum Credit Amount
The Maximum amount for Tax Year 2019 is:
|$6,557||with three or more qualifying children|
|$5,828||with two qualifying children|
|$3,526||with one qualifying child|
|$529||with no qualifying children|