“Oh, dear! Something’s wrong!” That’s what you’re going to shout at your computer screen when TurboTax® finishes its calculation, or at your accountant when she hands you your tax return. If you’re prone to profanity, your reaction might be even more descriptive of the shock you’re feeling. “I owe that much?! But I’ve always gotten a refund!”
I’m a Certified Public Accountant—thankfully retired. Over my 40 years of preparing other people’s tax returns, I heard those expressions several times, but not as often as tax professionals will hear them this year. Why? Because on Dec. 20, 2017, Congress enacted a conglomeration of verbiage called the “Tax Cuts and Jobs Act,” that overhauled the tax law and went into effect just 12 days later on Jan. 1, 2018. So, the IRS and state tax commissions in every state have been scrambling to revamp tax forms and employee withholding tables that affect your take-home pay.
Idaho’s legislature acted quickly, but the state’s normal conformity to the federal tax code would have created windfall revenues to the government and increased tax burdens for Idahoans. Consequently, lawmakers amended Idaho statutes, providing for child tax credits to help offset the federal law’s elimination of exemptions, and reductions in state income tax rates. So, instead of facing $97 million in additional taxes, Idaho families and businesses will see a $130 million tax cut beginning in 2018.
A word of caution: not all taxpayers will see their taxes go down. In fact, a few will see their tax liability increase at both the federal and state levels because of the complex restructuring of the tax law. Most people, however, will enjoy an overall tax reduction.
“Then why in the world do I owe more taxes this year on my tax return?”
- It took the IRS and State Tax Commission time to re-work the withholding tables and re-figure a new W-4 (that form you fill out to tell your employer how much to withhold from your paycheck for federal and state income taxes). We were well into 2018 before adjustments were final. Until then, withholding had been based on how many “exemptions” you claimed on your W-4—a concept that was invalid under the new law.
- If you’re still yelling at your accountant, chances are you never completed the new W-4 for your employer even when it became available last year. You missed the news releases, the television announcements and even the notice from your employer urging you to adjust your withholding. So, while exemptions vanished and withholding tables changed, your outdated W-4 was still out there telling your boss to withhold what was now an insufficient amount. You probably saw a small increase in your take-home pay. Not large enough to celebrate, but when multiplied by a year’s worth of pay periods, your tax withholding became less and less adequate to cover your yearend tax liability.
The result: “Oh, dear! Something’s wrong!” And last year’s “refund” turned into this year’s “tax due.”
Now we are into 2019 and many of you still have not updated your W-4s. The longer you wait, the more likely that your withholding will again be insufficient. Advice from a retired CPA: get the new federal and state W-4 forms (and the accompanying worksheets) from your employer and recalculate your “allowances” (the new term that is quite different from the obsolete “exemptions”); or go online to www.irs.gov/pub/irs-pdf/fw4.pdf for a federal W-4 and to https://tax.idaho.gov/i-2033.cfm for the state.
If you wait, you will be reminded when you stare at the computer screen or into the droopy eyes of your calloused accountant in the coming weeks.