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Check Your Withholdings!

It was widely publicized that the Tax Cuts and Jobs Act of 2017 (TCJA) reduced tax rates, resulting in a reduction of the tax liability for many. However, upon filing their returns, some taxpayers found that they were getting lower refunds than in previous years or had balances due. So what gives? For many, the reason was simple, but largely flew under the radar: lower withholdings. Because tax rates were lower, employers adjusted withholding amounts so that many employees were taking home more in their paychecks. The lower withholdings during the year meant that there was less paid in towards the tax liability.

This was especially true for withholdings on “supplemental wages” – bonuses, equity awards, and other special or non-recurring compensation. Typically, employers are only required to withhold at a flat rate on these types of compensation, and the TCJA reduced the flat rate from 25% to 22%. However, for many high earners, the actual tax liability associated with this income was greater than 22%. For those who received a significant portion of their earnings as a bonus, this may have resulted in a significant underpayment and a large balance due.

The good news is that employees can monitor and change their withholdings throughout the year, if they anticipate a shortfall. It is wise for employees to review current earnings and withholdings to get a better understanding of their current tax picture, and then, if necessary, adjust their withholdings. Even if an increase in withholdings for the rest of the year is not enough to cover a shortfall from the beginning of the year, at least they’ll know now that a big tax payment is on the horizon rather than getting a big surprise in April. Further, they can prepare by raising the necessary funds from other sources.

If you have questions about estate planning, probate, trusts, and tax matters, please contact one of Conn Kavanaugh’s experienced estate planning lawyers.

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