Remember that two-year comparison included in your tax package this year? The one that showed your 2017 tax situation in comparison to the impact that the Tax Cuts and Jobs Act would have if everything stayed 100% the same. Most of you saw a positive outcome - despite the loss of some itemized deductions and personal exemptions. This is due to the change in the tax brackets, the increase in the child tax credit, the pending qualified business deduction and other factors. But as I mentioned, these positive outcomes were contingent on your estimated payments and/or withholding remaining the same.
Most of the time, if you were required to pay estimated payments, I assessed these payments to remain the same, or even increased them, to make up for other areas of lost deductions or credits. But the withholding is an issue. At the beginning of the year, the withholding tables were adjusted for the new tax laws, which means that your employer may have not been withholding enough tax based on your overall tax situation.
The U.S. tax system is a pay-as-you-go process. Taxes must be paid as income is earned or received during the year. With the new tax laws, the way tax is calculated for most taxpayers has changed. In addition, any change in your tax situation for the year (e.g., selling stock, changing marital status, working multiple jobs, etc.) can affect how much tax needs to be paid during the year.
If you receive salaries, wages, pensions, unemployment compensation and any taxable Social Security, you can adjust the amount of tax withheld. Some income is not subject to withholding, including income from self-employment or rental activities. Therefore, some of you may need to make estimated tax payments unless you expect to owe less than $1,000 when you file or if you had no tax liability in the prior year (subject to certain conditions).
Making an adjustment to withholding or making an estimated tax payment may help you avoid an unexpected year-end tax bill and a potential penalty. I am happy to run some numbers from now to the middle of January to make sure you are on track, or to advise you to send a payment in for the fourth quarter. Bottom line: Let’s try to avoid a big (and costly) surprise!