This modification may produce one of the following for you: (1) you are under-withheld, which will result in unexpected tax liabilities upon the filing of your 2018 returns, and perhaps the imposition of penalties for under-withholding; OR (2) you may be over-withheld, which means you are paying too much in taxes.
We have found, in preparing 2018 income tax projections, that many clients who have not modified their withholding allowances from what they were for 2017 will owe substantial federal tax, and in some cases underpayment penalties, upon the filing of their 2018 returns.
It is also possible that there will be unexpected state income taxes and penalties owed, resulting from the loss of certain Federal itemized deductions under the provisions of TCJA. The taxpayers most at risk of under-withholding are two-income joint filers with adjusted gross income (AGI) of more than $200,000, and single filers with AGI over $175,000.
The federal underpayment rate is determined quarterly. The current rate is 4% per annum. State underpayment rates are generally higher.
In addition, penalty and interest will accrue on 2018 tax not paid by the due date of 2018 returns in April, 2019. Taxpayers will not want to be caught unable to pay unexpected balances due.
1. Pay in 110% (100% for some taxpayers) of the prior-year tax through withholding and/or timely quarterly estimated tax payments.
2. Pay in 90% of current-year tax through withholding and/or timely quarterly estimated tax payments.
Special provisions may apply to taxpayers whose income is earned unevenly over the course of the year. State rules generally follow federal rules.
Check your latest pay stub for year-to-date federal and state income tax withholding, and project it out for the remainder of the year. Compare the projected 2018 withholding to your 2017 withholding.
1) Explanation of estimated taxes and underpayment penalty
2) Federal withholding tables
Tax projection software is available on various websites, but we cannot recommend specific programs.