The 2017 Tax Cuts & Jobs Act included many significant changes that took effect January 1st, 2018 and impacted all taxpayers. Key changes included lower income tax rates coupled with income bracket expansions, an increase in standard deductions, elimination of personal exemptions, limitations on State and Local tax deductions, modification to the child tax credit, and the elimination of unreimbursed employee business deductions. Taxpayers should take these changes into account when planning for their estimated 2018 tax liability. The combination of these changes will have most taxpayers reporting a higher level of taxable income in 2018 but a lower total tax liability, assuming income and deductions are consistent. The Tax Policy Center, which provides independent analysis of various tax issues, has published a study on the impact of these changes that concluded:
- 80% of taxpayers will receive a tax reduction in 2018, averaging about $2,100.
- 5% of taxpayers will face an average tax increase in 2018 of about $2,800.
Due to the decrease in income tax rates, the IRS issued new withholding tables which are used to calculate the amount of Federal withholding deducted from employee paychecks. The new tables decreased the amount of Federal withholding to adjust to the lower tax rates. At the end of the year, this will result in a lower amount of withholding reported on tax returns. In order to safe-harbor taxpayers from penalty and interest assessments on the underpayment of tax, the IRS requires taxpayers to pay in the lessor of:
- 90% of the tax shown on the return for the taxable year, or
- 100% of the tax shown on the return of the individual for the preceding year
(Note that if the adjusted gross income shown on the return of the individual for the preceding taxable year exceeds $150,000, then 110% of the preceding year’s tax is required.)
If a taxpayer fails to meet the safe-harbor rules, penalty and interest on the underpayment will be assessed. Due to changes brought in by the Tax Cuts and Jobs Act, some taxpayers may have reduced credits and deductions compared to 2017 resulting in higher taxable income. Higher taxable income, together with lower withholdings for the year, could cause the taxpayer to fall short of the requirements, which may result in hundreds or possibly thousands of dollars in penalty and interest being assessed.
The IRS is urging taxpayers to engage in a “Paycheck Checkup” to make sure they are covered during this transition year. The IRS Withholding Calculator can help taxpayers gain a better understanding of where they stand for the year. This change will affect each taxpayer differently. To have a customized projection performed for your specific tax situation, please contact our Jackson or Grand Rapids office.