With so many changes to the tax laws, we have had a lot of recent requests for tax planning. Every projection I have made this year has resulted in a lower total tax amount for 2018 compared to 2017. Despite losing some deductions, the lower tax rates and other areas of the equation have resulted in a lower total tax. That is lower, “Total tax;” I said nothing about refunds.
These projections can be flawed unless our client provides us with a current pay stub so that we can measure current withholding to compare to the projected total tax amount. Because of the expected lower 2018 tax, standardized withholding table amounts are lower this year and most employees are having lower amounts withheld from their paychecks. If your take-home pay went up around February, then this applies to you. I can only speculate as to the government’s intention, but it probably has to do with Parkinson’s Law, which says that expenses always rise to meet income. So if people have more money in hand, they are likely to spend it, thus adding fuel to the economy.
Think of it like this, the government wants to aid the economy so it lowers the income tax. But it wants results now, not on April 17 of next year, so how do you get results now? By decreasing the withholding from people’s paychecks and putting a fraction of their usual refund into their hands now instead of later.
If you are one of those people who expect or rely on your annual refund, you do not want to break even, or worse, have to pay in. You need to review your 2018 withholding now so that you can overpay now in order to get that refund come April 17, 2019. For us accountant’s this is an illogical way to save, but we understand why some folks do it this way.
If you are already used to living without it, and you rely on your refund, you should immediately inform your employer to increase your withholding to previous levels. That will fix your refund for the long term but you will have a shortfall for the months February through now, so plan for that and save money using your bank account rather then doing it as part of your payroll function. You can use the new IRS withholding calculator here: https://www.irs.gov/individuals/irs-withholding-calculator to see if you are going to have a shortfall. Contact your licensed tax professional for tax planning if your situation is complicated by a business, or you expect a major taxable event such as selling capital assets.