The 2017 Tax Cuts and Jobs Act (“TCJA”) changed tax withholdings for W-2 wage earners. Because the new law nearly doubled the standard deduction, employees had less withheld from their paychecks. <\/p>\n
The required withholding on bonus payments, vested restricted stock and stock options also changed, from 25% to 22%. The problem is that a significant number of filers were under-withheld, due to the way in which W-4 forms were completed. <\/p>\n
If a married couple each filed out their W-4 declaration as \u201cmarried filing jointly\u201d and each failed to mark the \u201cwithhold at single rate\u201d box, the government software treated each as having their income reduced by $24,000 (or $48,000 combined for the married couple, instead of $24,000) and computed withholding accordingly. The result was an unintended under-withholding, and a reduced tax refund or unanticipated tax liability. <\/p>\n
To reduce the risk of future under-withholding, married taxpayers filing jointly should review their W-4 declaration to confirm that the \u201cwithhold at the single rate\u201d is marked for each spouse.<\/p>\n
Taxpayers who anticipate additional income from non-traditional wage sources such as bonuses, stock vesting or stock option income should consider having more withheld. <\/p>\n
Taxpayers who were used to deducting more than $10,000 in state and local taxes should also review their withholding, as the new law limits the deduction for state and local taxes (\u201cSALT\u201d) to $10,000. <\/p>\n
Social Security withholding rates also changed \u2013 to 7%, 10%, 12%, or 22%. Social Security recipients with a marginal tax rate of more than 12% may need to adjust the withholding on their Social Security payments.<\/p>\n
While the Tax Cuts and Jobs Act generally reduced taxes for most employees, care must be taken in completing the W-4 to avoid under-withholding, and additional attention is required for those with non-wage income. <\/p>\n
As always, advice from a tax professional is recommended before completing W-4 forms or determining withholding amounts.<\/p>\n