Raechel Taddei, BridgeTower Media Newswires
The IRS is working on a new Form 1040 for the 2019 tax season and announced in late June that they are streamlining the Form 1040 into a “shorter, simpler postcard-sized” form intended to replace and consolidate current Forms 1040, 1040A and 1040EZ so that all 150 million taxpayers can use the same form. The shortened form reflects many of the changes to the tax code under the Tax Cuts and Jobs Act (TCJA) and fulfills a political promise. Yet, with roughly 90 percent of taxpayers filing electronically these days, the substantive issues to focus on currently should primarily be the tax law changes, such as the higher standard deduction and the elimination of certain deductions and personal exemptions, rather than the semantics of a new Form 1040.
On June 28, 2018, one day before the IRS Newswire issued its announcement about the new draft Form 1040, they released an article (IR-2018-145) reminding taxpayers to check their withholdings. The IRS has always recommended that employees check their withholding at the beginning of each year or when their personal circumstances change (such as a divorce or marriage) to make sure they’re having the right amount of tax withheld from their paychecks. This year, it’s more important than ever to do a “Paycheck Checkup” because of the major changes from the new TCJA. Among other things, the new law increased the standard deduction, removed personal exemptions, increased the child tax credit, limited or discontinued certain deductions, and changed the tax rates and brackets.
For people with simpler tax situations, the 2018 withholding tables were designed to produce the correct amount of tax withholding to avoid under or over withholding of tax so that no change needs to be made by those employees. Simple situations include singles and married couples with only one job, who have no dependents, and who do not claim itemized deductions, adjustments to income or tax credits.
But many people have more complicated financial situations, and may need to revise the amount of tax withheld from their wages. Among the groups with more complicated financial situations who should check their withholding are:
• Two-income families;
• People working two or more jobs or who only work for part of the year;
• People with children who claim credits such as the Child Tax Credit;
• People with older dependents, including children age 17 or older;
• People who itemized deductions in 2017;
• People with high incomes and more complex tax returns; and
• People with large tax refunds or large tax bills for 2017.
The IRS offers a “Withholding Calculator” tool accessed on the website’s home page (irs.gov) to assist taxpayers to do a “Paycheck Checkup” and apply the new law to their financial situation so a decision can be made whether to change their withholding in 2018. The calculator will ask you to estimate values of your 2018 income, the number of children you will claim for the Child Tax Credit, and other items that will affect your 2018 taxes. Gather your most recent 2018 pay stubs and a copy of the2017 completed Form 1040 to estimate 2018 amounts. Be assured that the Withholding Calculator does not ask you to provide sensitive personally-identifiable information like your name, Social Security number, address or bank account numbers and the IRS does not save or record the information you enter on the calculator.
The results from this calculator can help you to complete a new Form W-4, Employee’s Withholding Allowance Certificate, to be submitted to your employer as soon as possible so the new withholding amount can begin. The fewer withholding allowances an employee enters on the Form W-4, the higher their tax withholding will be. Entering “0” or “1” on line 5 of the W-4 means more tax will be withheld; entering a bigger number means less tax will be withheld. If a mid-year 2018 change is made, the IRS is cautioning that you recheck your withholding at the start of 2019. A mid-year withholding change in 2018 may have a different full-year impact in 2019 so if you do not file a new Form W-4 for 2019, your withholding might be higher or lower than you intend next year.
The calculator may also be helpful to recipients of pension and annuity income. These recipients can change their withholding by filling out Form W-4P and giving it to their payer.
People with more complex tax situations should use Publication 505. This publication is more effective for employees who owe self-employment tax, the alternative minimum tax or tax on unearned income from dependents. It can also help those who receive non-wage income such as dividends, capital gains, rents and royalties. The publication includes worksheets and examples to guide taxpayers through particular situations.
Of course, the Withholding Calculator and Publication 505 are not meant to be a substitute for advanced tax-planning. Changes, both the TCJA tax law changes and the proposed revised 1040 form, create uncertainty for taxpayers. For the tiny slice of taxpayers accustomed to filing paper forms, lines eliminated from the old Form 1040 will now be spread across multiple worksheets and will likely confuse taxpayers and increase errors.
In addition, the underlying complexity of the tax code that drives people to tax professionals and computer programs hasn’t changed. Taxpayers needing advice regarding the new tax law and personal situations should consult a trusted tax professional. A tax professional can help clients understand more fully actions they need to take now to avoid potentially unpleasant surprises next tax season.
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Raechel Taddei is an enrolled agent and tax manager with Mengel, Metzger, Barr & Co. LLP. She may be reached at rtaddei@mmb-co.com.
