Politicizing withholding tables

[kathyc2]

https://www.politico.com/story/2018/01/10/tax-reform-paychecks-irs-332183

Interesting article that pols are looking to play the short game rather than long game. The majority of hourly workers pay varies based on hours worked and OT and will not notice a few extra dollars a week, and will not attribute it to a ‘tax cut”. But when they file 18 returns in 19 they will definitely notice a smaller refund.

It would be helpful to us if they get the new tables out before we start preparing 17 returns. The norm for estimated payments for client with both w-2 and other income is to assume withholding for estimated year will be same as prior year. Reducing withholding formulas could cause havoc on our estimated calculation.

[Rapid Robert]

" The norm for estimated payments for client with both w-2 and other income is to assume withholding for estimated year will be same as prior year. "

These specific clients tend to be higher income, and so you shouldn't make any assumptions about withholding. In this case, I always get a copy of the two most recent paystubs per individual and use a spreadsheet to project what the year end paystub (and W-2) will look like. (I have never found a W-4 calculator that does a good job for people with uneven salary income, such as bonus/stock grants, or for people who max out their 401k before the end of the year). For some clients, I do this in June and again in September, and update the estimates accordingly. If you are counting on prior year safe harbor to avoid Form 2210 penalty, you are correct that you can't just use last year's withholding for the current year.

I do agree with your comment (have not read the linked article) that for W-2 only taxpayers, playing with the withholding tables can be used for various purposes, some helpful and some not. This assumes people have done a good job with W-4 and state equivalent in the first place.

[Nashville]

2210 penalty

I have always practiced (except for high income taxpayers) that if the previous year's tax liability was paid in during the current year, the estimated tax penalty would not apply.

Has the new tax law changed this??

[kathyc2]

" The norm for estimated payments for client with both w-2 and other income is to assume withholding for estimated year will be same as prior year. "

These specific clients tend to be higher income, and so you shouldn't make any assumptions about withholding. In this case, I always get a copy of the two most recent paystubs per individual and use a spreadsheet to project what the year end paystub (and W-2) will look like. (I have never found a W-4 calculator that does a good job for people with uneven salary income, such as bonus/stock grants, or for people who max out their 401k before the end of the year). For some clients, I do this in June and again in September, and update the estimates accordingly. If you are counting on prior year safe harbor to avoid Form 2210 penalty, you are correct that you can't just use last year's withholding for the current year.

I do agree with your comment (have not read the linked article) that for W-2 only taxpayers, playing with the withholding tables can be used for various purposes, some helpful and some not. This assumes people have done a good job with W-4 and state equivalent in the first place.

I have a lot of non high income people that pay estimated. One spouse has w-2 income, other has SE income, rental income, the list goes on. The group I have with highest percentage of estimated payments is seniors. Often they have income from a variety of sources: SS, 401K, non qualified etc. I'm assuming the withholding for pension and retirement accounts distributions will also change. I've identified several of my senior clients that will pay more with new tax laws, and if withholding decreases estimates will generally need to be more.

[kathyc2]

I have always practiced (except for high income taxpayers) that if the previous year's tax liability was paid in during the current year, the estimated tax penalty would not apply.

Has the new tax law changed this??

Not technically. Say that in 2017 TP had 10,000 of withholding, and you use the presumption that 2018 will also have 10,000 w/h when figuring how much estimated will need to be paid in 2018 to equal the total of 2017 liability. If the new withholding tables decrease the 10K to 8K, you are going to be 2K short of 2017 liability paid in during 2018.

[ATSMAN]

I have always practiced (except for high income taxpayers) that if the previous year's tax liability was paid in during the current year, the estimated tax penalty would not apply.

Has the new tax law changed this??

Unless I am missing something I believe that law has not changed post TCJA. And that is a good rule of thumb for folks who have varying income each year on which taxes are not withheld (Dividends, interest etc.). I tell my clients to call me if they get some additional income in a year that they don't get regularly and then we determine if the estimated taxes should be bumped up.