More than 30 million taxpayers could owe money to the government next year, thanks in part to the new tax law.
Taxes for more than a fifth of Americans (21%) could be underwithheld, meaning that their employer hasn’t taken enough money out of their paychecks to cover taxes, according to a Government Accountability Office report based on a simulation run by the Treasury Department. When employees’ taxes are underwithheld, they owe more money at tax time.
Had there been no change in the tax law, 18% would have been underwithheld. That’s 3 million fewer people. Six percent of taxpayers are expected to break even next year, and the remainder will get some sort of refund. The Tax Cut and Jobs Act, which in addition to cutting corporate taxes included increasing the standard deduction and lowering the tax brackets as well as sharply curtailing the state and local income taxes that could be claimed on federal returns, passed Congress on a partisan basis last December and was signed into law by President Trump before Christmas.
‘This wasn’t just a tax-law change; it was the biggest since 1986. It should have been incumbent on the IRS to do a good job on withholding.’ Bill Smith, CBIZMajor changes to the tax law rarely run smoothly, said Chester Spatt, professor of finance at the Tepper School of Business at Carnegie Mellon University.
“This wasn’t just a tax-law change; it was the biggest since 1986,” said Bill Smith, managing director at CBIZ MHM’s national tax office. “It should have been incumbent on the IRS to do a good job on withholding.”
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So why might more Americans owe taxes next year? It may depend on whether they or their employers adjusted their withholdings. Employees can determine how much they would like withheld from their paychecks, which means choosing allowances that fit their personal situations. Employers then subtract that amount from the employees’ pay, and the rest is subject to withholding, which employers calculate using IRS tax tables.
The IRS and Treasury Department had “limited documentation” for how it updated the withholding tables, according to the GAO report, though both agencies said they reached out to taxpayers through email, social media and on the Web, to encourage them to assess their withholdings. “With the new tax-law changes, it’s especially important this year,” an IRS spokeswoman told MarketWatch. Taxpayers can use the withholding calculator on IRS.gov to assess their situation.
There are other reasons Americans may owe more money. Employees in high-tax states including California and New York may be affected by the new limitations on state and local tax deductions, which would increase their tax burden, Spatt said.
Also see: How homeowners win and lose under the new tax law
It’s not too late for taxpayers to reduce the amount they owe next April. They should check their withholdings and run a projection on tax software or with an adviser, Spatt said. They can also choose to send money directly to the government by paying taxes quarterly, instead of through an employer, he added.
Taxpayers need to consider what a change in their withholdings will do to their current finances, however. Adjusting allowances to have money withheld, which may offset how much is owed in April, means having less in take-home pay for the rest of the year, Smith said. This may be particularly difficult for the millions of Americans who live paycheck to paycheck, he added.
One safe scenario may be to adjust withholdings enough so that taxpayers are paying as much in taxes as they did in prior years, which would avoid a penalty, Smith said. Then, they should create a plan to pay for the rest before the April deadline. “You want to make sure you are not in a penalty situation, and the best solution is to bite the bullet and adjust withholdings,” he said.
Employers aren’t the only ones struggling to understand the new tax law. More than three-quarters of workers said they were confused by it, according to a TaxAudit survey of 2,500 people. Almost half of taxpayers didn’t know if the tax law would benefit them or not.
