TCJA’s Potential Impact on Estimated Tax Payments and Withholdings

The Tax Cuts and Jobs Act (TCJA) will alter taxpayers’ 2018 tax bills. Many individuals will see a reduction in taxes in 2018. However, some taxpayers, especially those who will lose significant itemized deductions, could see a tax increase.

Individuals are required to combine estimated tax payments and withholdings and cover at least 90 percent of the tax due with the current year tax return or 100 percent of the prior year tax (110 percent for high-income individuals). Changes to the wage withholding tables could leave individuals underpaid even if their overall liability decreases.

Taxpayers should keep the following TCJA changes in mind when reviewing their individual estimated tax and withholding situation:

• Individual tax rates have decreased, with the top rate dropping from 39.6 percent to 37 percent for 2018.
• Self-employed individuals or owners of interests in pass-through entities might be entitled to a deduction of up to 20 percent of the income from those businesses.
• The 3.8 percent tax on net investment income for high earners remains in place.
• The alternative minimum tax remains in place for individual taxpayers. The exemption amount has increased to $109,400 for married filers ($70,300 for single filers), with a phaseout starting at a higher income level.
• Personal exemptions have been repealed for 2018. In their place, individuals will receive an increased standard deduction of $24,000 for married filers ($12,000 for single filers).
• Many itemized deductions have been limited or eliminated beginning in 2018 including:
• The deduction for state and local taxes is capped at $10,000, and the IRS has disabled the efforts of some states to work around the cap.
• Moving expenses.
• Medical expenses.
• Unreimbursed employee expenses.
• For mortgages taken out on or after Dec. 15, 2017, the home mortgage interest deductions are limited to interest on $750,000 of acquisition indebtedness.
• The deduction for home equity indebtedness.
• The child tax credit is increased to $2,000 per child, phasing out beginning at $400,000 for married taxpayers ($200,000 for single filers).

Individual taxpayers expecting a reduction in their 2018 taxes should evaluate their situation as reductions in the IRS’ wage withholding tables could leave them underpaid. As a result, taxpayers should review their 2018 estimated tax liability and adjust estimated payments or withholdings before the end of the year to avoid any surprises in April 2019.