3 Things to Know About W-4 Withholding and Tax Reform

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What Does the Tax Reform Package Mean for Your Clients?

The newly signed Tax Cuts and Jobs Act (summary of changes) overhauls the tax code and provides broad tax relief to workers, families and businesses of all sizes. A typical family of four earning $73,000 a year could receive a tax reduction of as much as $2,000. Most of the provisions contained in the tax reform bill apply to tax year 2018.

Taxpayers across the country will be filing their 2017 tax returns between now and April 17, 2018, and are now faced with what to expect and what to do with the 2018 tax changes. You can help them determine what tax reform means for them and increase your standing as your clients’ trusted advisor.

How Will Tax Withholding Impact Your Clients’ Paychecks?

Under the new rules, individual tax rates are being lowered to 10%, 12%, 22%, 24%, 32%, 35% and 37%, and these rates will ultimately be reflected in the amount of money being withheld from your clients’ 2018 paychecks, as well as their tax liability for 2018.

On Jan. 11, 2018, the IRS released an update to the income tax withholding tables for 2018 that now take into account the new rules in the tax reform act. Employers and payroll companies will begin using the new withholding tables no later than Feb. 15, 2018. Until then, your clients’ January 2018 paycheck will look similar to their December 2017 paycheck.

For people with simpler tax situations, the new tables are designed to produce the correct amount of tax withholding. The revisions are to help withhold the correct amounts from taxpayers’ paychecks. In addition, changes in the law, such as changes in available itemized deductions, increases in the child tax credit, the new dependent credit and elimination of personal and dependent exemptions, will impact your clients’ withholding on their paychecks.

Each year, federal withholding should be close to your clients’ ultimate tax liability so they don’t owe money or get a refund.

Do Your Clients Need to File a New Form W-4 With Their Employers?

Form W-4, Employee’s Withholding Allowance Certificate, is completed and submitted to your clients’ employers so they know how much tax to withhold from pay. Typically, taxpayers would file a new W-4 when their personal or financial situation changes. A W-4 takes into account the number of people in your household, tax credits, deductions and other income, and if you have more than one job or you’re a two-earner household.

Because of  the changes to the 2018 tax laws such, including itemized deductions, increased child tax credit to $2,000, the new dependent credit, and the eliminations of dependent and personal exemptions, your clients should file a new Form W-4 with their employers in response to the new tax law, if their personal situations changed, or if they started a new job.

What About Self-Employed and Small Business Owners?

Your clients who are self-employed and small business owners may also wish to make adjustments to estimates they pay into the government. Form 1040-ES Estimated Tax for Individuals is used to figure and pay tax on income not subject to withholding, such as self-employment income. The IRS has not yet issued the 2018 version of Form 1040-ES, which will take into account the new tax changes.

For more questions about tax reform, visit the Intuit® ProConnect™ Tax Reform Resource Center.


Editor’s note: This article was originally published on Jan. 10 and updated on Jan. 16 to reflect the update from the IRS.

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