Managing Federal Income Tax Withholdings: Refunds and Amounts Due

Starting in January 2018, we began talking to clients about adjusting the amount of federal tax amounts that were being withheld by their employers. Last year, we were also performing 2018 estimated tax calculations for clients and considering their fact patterns. We specifically looked at the 2017 Tax Cuts and Jobs Act’s (TCJA’s) disallowance of itemized deductions in 2018; particularly the limitation to deduct state and local income taxes and real estate taxes. The 2018 maximum deduction amount for these items was $10,000 and remains at this amount in 2019. In addition, effective in 2018 was a reduction in the cap on the amount of qualified home mortgage amounts and, therefore, a potential reduction in the amount of deductible mortgage interest. Additionally, certain itemized deductions were also eliminated by the TCJA, such as deductions for job-related expenses.

Because of the aforementioned changes that reduced 2018 individual tax deductions (and will again in 2019), two noteworthy circumstances arose. First, taxpayers with wages and the related federal tax that would have been over-withheld (with considerations of the above deductions) decreased in 2018, resulting in lower federal tax refunds. Reduced 2018 tax rates and withholdings under the 2017 legislation also contributed to this outcome. Also, the number of taxpayers who were under-withheld increased. Second, many taxpayers did not adjust their tax withholdings in 2018, adding to the predicament of being under- or over-withheld. The General Accounting Office expects that the percentage of taxpayers with under-withheld tax is expected to be close to 32 million, with taxpayers thereby owing tax in 2019 (21% of the more than 150 million taxpayers, including extensions who are expected to file). However, the IRS has also estimated that 99% of income subject to withholding, like wages and salaries, is accurately reported.

We are analyzing clients’ 2019 tax deductions, proper tax withholding amounts, estimated tax payments, and estimated 2019 taxable income. Regarding compensation reported on Form W-2, employers are required to withhold income taxes on employee compensation; however, employees can review and adjust their tax withholdings. Completing a 2019 Form W-4 can help determine how much federal tax should be withheld from compensation.

So, what should you consider? Optimally, the objective is to adjust your 2019 Form W-4 and thereby avoiding excess tax withholdings, so you receive the maximum amount of income throughout 2019, instead of waiting until 2020 for a federal tax refund.

Part 2: 2019 Economic Impact of Reduced 2018 Tax Refunds to come. So stay tuned!