Check your Withholding and Estimated Tax Payments!
The U.S. tax system operates on a pay-as-you-go basis. This means that taxpayers need to pay most of their tax during the year, as the income is earned or received. Taxpayers must generally pay at least 90 percent of their taxes throughout the year through withholding, and/or estimated or additional tax payments. If they don’t, they may owe an estimated tax penalty when they file.
The 2017 Tax Cuts and Jobs Act (TCJA) changed the way tax is calculated for most taxpayers, including those with income not subject to withholding. The IRS is warning all taxpayers to check their withholding numbers from a recent pay stub with the IRS’ online withholding calculator to see what their estimated tax bill will be, Doing so now while there is still time in 2018 will help avoid an unexpected year-end tax bill and possibly a penalty when the taxpayer’s 2018 return is filed next year.
Some examples of taxpayers who should do a withholding checkup are:
- high-income taxpayers who lost the majority of their state and property tax deductions
- taxpayers with large miscellaneous itemized deductions subject to the 2% limitation; salespeople, entertainers, investors etc.
- families who will be affected by the elimination of the personal exemption and the changes in the dependent and child credits
- taxpayers who want a tax refund. Some taxpayers use an annual tax refund as a form of forced saving.
Other taxpayers who may need to make estimated payments include those who:
- have more than one job, but don’t have each employer withhold taxes
- are self-employed
- are independent contractors
- are representatives of a direct-sales or in-home-sales company
- participate in sharing economy activities where they are not working as employees.
Many states, including California, will not conform to some or any of the TCJA changes, so it would be wise to check your state withholding and estimated payments at the same time as the federal review.