Now that tax season is officially underway, you might have seen some recent news coverage that some taxpayers from around the country are surprised that they owe tax. This is generally stemming from taxpayers’ awareness of tax reform (Tax Cuts & Jobs Act) that took effect last year and thus the anticipation of a (larger) refund this year.
So what’s going on? The first important thing to understand is to not confuse a refund (or lack of one) with the actual amount you paid in taxes during the year—either through withholding or quarterly payments. With that said, there’s a couple of common reasons some people are seeing lower refunds or a balance due this year.
Insufficient Tax Withheld
When the TCJA changes were enacted last year (see our earlier newsletter articles here and here), so were changes in what has been withheld from paychecks. In fact, in general, beginning in early 2018 when tax reform took effect, many employers starting taking less money out of their employees' paychecks. As a result, it’s estimated that millions of taxpayers had lower withholding once the new tax law took effect in 2018. While some taxpayers falling into this group might end up with a lower refund (or no refund), they received more money in each paycheck. However, that extra money might not be noticed because of other factors, such as increased health insurance premiums or other paycheck deductions.
If you didn’t adjust your withholding last year, you might want to consider doing a quick checkup to ensure you’re on track for 2019. The simplest method is to review the Form W-4 worksheet, which has a simple worksheet to help you figure out how much to withhold: https://www.irs.gov/pub/irs-pdf/fw4.pdf If you decide to make changes, follow your employer’s procedure to adjust your withholding.
Tip: With the new tax reform changes, claiming just one or even zero allowances on your W-4 may not have created enough tax withholding! So keep in mind that you can freely have more withheld than the amount you compute on the W-4 worksheet. Just add the extra amount to line 6 of the form W-4. The IRS allows you to change your withholding amount anytime during the year, as often as you want.
Taxpayers Living in States High State and Local Taxes
Some taxpayers with higher incomes in states with high state and local taxes are being impacted by the tax reform changes. Many residents in these states will probably be paying more in income taxes starting with the 2018 tax year. This is due mostly to the new limitations on deducting state, local and real estate taxes.
Other Common Reasons
While Tax Reform will certainly create unexpected results for some taxpayers, there's a few common events every year that can result in being underpaid (i.e., owe tax) on your tax return. If you and/or your spouse didn't make estimated tax payments last year and had any of the following events, you might be underpaid for the year:
Keep in mind that if you are self-employed (sole proprietor, independent contractor, freelancer, consulting, etc.) you are also responsible to pay self-employment tax. Unlike an employee who shares the cost of FICA tax with their employer, self-employed persons are responsible for the full burden of paying for their Social Security and Medicare!
You can read more tax articles on our blog: