The new tax law lowered income tax rates and eliminated exemptions. It also reduced the state income tax deduction to $10,000 (max) and eliminated deductions for employee business expenses not reimbursed by an employer.
IRS withholding tables issued on January 11th reflect the lower tax rates and no exemption deductions. But the charts do not factor the loss of employee business expenses and state income tax deductions. So you may not be paying enough tax with your withholdings and could owe more money than you expected with the filing of your 2018 tax return.
The IRS will publish an income tax calculator in February which will allow employees to adjust their withholdings so their taxes are not under (or over) withheld. Congress gave the IRS one year to fix the withholding tables to conform to the new laws. So you may need to take action now to ensure you do not have a significant balance due when you file your income tax return.
Also, employees paid bonuses, stock options, and commissions are at risk of under-withholding because the withholding rate for this income is now 22% (formerly 25%).
And remember penalties still apply to underpaid taxes. The penalty rate is currently 4%.
We will post a link to the income tax calculator on our website when the calculator is available. Contact us if your tax situation is complicated. We have the knowledge and skill to calculate complicated income tax projections. Call us at (323) 285-9880.
It is still early in the year, so now is the time to find out if you are underpaying your taxes. You will have the rest of the year to pay taxes with increased withholdings.