The changes to the individual income tax effective for 2018 will be fully felt next filing season. As paychecks start rolling in for employees, IRS has released an online withholding calculator that will allow people to adjust withholdings to reflect the changes. The old withholding system was based largely on personal exemptions. The new law, ostensibly at least for the next eight years, eliminates the deduction for personal exemptions and dependents.
In its place, among other changes, the new law doubles the standard deduction, boosts the child tax credit and lowers the tax rates.
These changes will for most taxpayers lower federal income taxes; to adjust withholding to minimize serving up an even larger interest free loan to Uncle Sam taxpayers should submit a new Form W 4 with their employers.
The online calculator will allow people to enter information, including projected income and eligibility for credits like the CTC and EITC, to see if they should prepare a new W4. Of course, if taxpayers do nothing, and the law reduces taxes, the effect will be just a greater refund next year. Yet, as some have noted, not everyone wins under the new law. An article in the WSJ from earlier this year points out for families who have older kids that have aged out of CTC eligibility but who would have qualified as dependents, the new law may in fact increase taxes and a failure to adjust withholdings may leave those taxpayers short and potentially subject to penalties. Our blogging friends at Surly Subgroup in a post by Sam Brunson made a similar point.
The loss of the dependency exemption will also impact individuals who do not have social security numbers since they can no longer claim the child tax credit and it will impact and taxpayers who previously claimed dependents who were qualified relatives since these dependents do not create a child tax credit to offset the loss of the exemption. Taxpayers with dependents that will not generate the child tax credit need to carefully consider the withholding tables and the tax impact of the changes on their 2018 return. Because this aspect of the new law does not receive as much attention as the tax cuts, an unpleasant surprise could be waiting for many taxpayers next filing season and for the IRS. If even a small percentage of taxpayers under withhold that previously over withheld, the IRS could find many more accounts in the collection stream with all of the additional work that entails. Getting the withholding amount correct seems like a small thing but it can have significant downstream consequences for taxpayers and the IRS.
I do not have much else to add other than to note that the online calculator does not require individuals to add identifying information that would potentially allow IRS to associate a taxpayer’s entered (or deleted) information with the taxpayer. That is key for privacy. I get a little antsy when I get a reminder email from an airline or retailer when I have not followed through with a purchase after submitting some information (e.g., an email from Southwest reminding me that flights were still available to West Palm Beach as I had explored fares to escape the endless winter here in Philadelphia). I suspect the government could have a keen interest in taxpayers who fiddle around with a withholding calculator, just as IRS would have interest in taxpayers and preparers changing information when preparing returns on tax software, especially for items that are not subject to information reporting or withholding.
About Leslie Book
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