You should review your tax withholding every year to see if any adjustments are needed. However, you should pay especially close attention to your tax withholding after doing your 2018 taxes because so many tax laws were affected by the Tax Cuts and Jobs Act (TCJA).
Why Some Taxpayers Had Low Withholdings in 2018
A failure to update your withholdings could result in surprises at tax time and potential underpayment penalties. In fact, the IRS had to expand one of their penalty safe-harbors because many taxpayers under-withheld their taxes due to changes under the TCJA.
The lower tax rates and increased standard deductions caused some taxpayers to take more money home each paycheck and pay less in taxes. However, other changes to the tax code caused some taxpayers to owe more, such as the limitation or elimination of some itemized deductions and the elimination of personal and dependency exemptions.
If you’re disappointed by your 2018 taxes, take note and adjust your withholdings or estimated taxes for next year.
Problems Caused by Underpaying Taxes
Underpaying your taxes throughout the year can cause the following problems:
- You could face underpayment penalties if you don’t pay enough throughout the year.
- You may be surprised by the tax liability, and you might not have the funds to pay your back taxes right away.
- You may have bought items on credit in anticipation of using your tax refund to pay the bill.
You can avoid these problems by either adjusting your W-4 form with your employer or modifying your estimated tax payments using Form 1040-ES.
Use your 2018 tax return as a baseline. As long as you pay at least as much throughout the year as you owed for last year, you’ll avoid underpayment penalties.
However, you should also think about whether you expect any financial changes this year. If you expect to earn significantly more income, you may want to increase your tax payments because even though you won’t be charged any penalties, you may still face a big tax bill next April.
Some taxpayers were shocked by their taxes this year because of the massive changes brought by the TCJA. By next tax season, you should be prepared and able to avoid potential tax problems.
The Gartzman Law Firm offers tax return preparation and tax settlement help. Use our contact form to request a consultation with an Atlanta tax resolution attorney.