Take it away: Helping clients with withholding

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The Tax Cuts and Jobs Act raised a lot of questions in clients’ minds — and it raised anger in more than a few last April when they saw how inadequate withholding sent their tax bill skyrocketing. But do they appreciate help?

“When the new withholding tables were released in 2018, we started advising clients to adjust their exemptions since it was apparent many would owe,” said Gail Rosen, a CPA in Martinsville, New Jersey. “As much as we tried to prepare clients that they might owe with their 2018 taxes, many people were still surprised. These clients are much more receptive now to adjusting their withholding.”

“Too many of my clients owed substantial amounts to the IRS when filing their 2018 returns due to the withholding fiasco,” said preparer Robert Flach, who writes “The Wandering Tax Pro” blog. “Until the IRS gets its act together with the W-4 and withholding tables, I’m advising all clients and readers to claim ‘Single-0’ or ‘Married but withheld at higher Single rate-0’ on all W-4s for all federal withholding from all sources. Better safe than sorry.”

“I spend more time working with my clients on withholding than I ever have before,” said Phyllis Jo Kubey, an Enrolled Agent in New York. “I did a lot of withholding planning when I was working with clients on their 2017 returns, looking at 2018 pay stubs and making as accurate tax projections as possible.”

Looking for a handle

Withholding seems to have been a pothole of tax reform. As reported by the National Taxpayer Advocate late last year, commenters said a draft W-4 violated privacy by requiring too much information about other income, placed too much on employers to figure out how much to withhold and was too complicated. The form’s helpmate, a withholding calculator, also required too much information from employees and was too complicated, critics claimed.

The IRS recently released a much different final W-4 for 2020 that is less complicated, but taxpayers will still benefit from working with the tax preparer to make sure they get their withholding right.

Genesis Accounting and Mgmt. Services, in Lorain, Ohio, has been checking clients’ withholding since starting to do 2017 returns, according to EA Debra James. “Although we didn’t have a handle on all of the changes the TCJA was to present,” she said, “we did know that the payroll tax tables were changing and that workers were going to see a reduction in their federal withholding — and for some, it was going to be a problem. Doing this in advance made having the conversation about their 2018 refunds easier.

“We did the same this past tax season, and continue to direct people to the checkup tool or to ask us for help in their planning,” James said. “It helps us as much as it helps our clients.”

“We prepare tax projections for clients throughout the year to help identify possible adjustments or pay in quarterly estimated taxes. We prefer being proactive so clients are better prepared and know what to expect,” said Erica Shaloy, tax director in the Fairview, Oklahoma, office of Wymer Brownlee Wealth Strategies.

What works

According to a survey by H&R Block, only 46 percent of respondents said they felt prepared to update their W-4 on their own. Only 19 percent updated their paycheck withholding after reform. Nearly half were unsure what factors could be considered a withholding allowance. Respondents were confused about who to submit an updated W-4 to: Forty-two percent knew it should go to their employer, but some thought it went to the IRS.

Only 48 percent knew that increasing withholding would result in a larger refund, while 47 percent knew that decreasing withholding would result in larger paychecks, according to the Block survey.

“We’ve been offering checkups for withholdings, but many people simply don’t see the value,” said Morris Armstrong, an EA and registered investment advisor at Armstrong Financial Strategies, Cheshire, Connecticut. “That can be because they were OK with last year’s results and figure nothing changed. To be frank, for many people that approach does work.”

The Government Accountability Office reports that 76 percent of taxpayers with wages were over-withheld for tax year 2017. Only 6 percent had wages withheld accurately.

Clients’ specific financial activities can also complicate working on withholdings. “It sucks!” said John Dundon, an EA and president of Taxpayer Advocacy Services in Englewood, Colorado. “Rogue brokers tend to do whatever they want in this market when it comes to recognizing gains and losses, usually without much interaction whatsoever.”

“Clients change jobs, make new pre-tax benefit options, have additional sources of income and so on, so I’m doing my best to train my clients to check in with me periodically to be sure we’re on track,” Kubey said. As she worked with returns on extension, she found a few clients who had changed jobs “and will be woefully underpaid if they don’t make changes. We’ve had to work out elaborate plans with combinations of withholding and estimated payments — and, more important, get a plan in place for January 2020.”

Armstrong has “become more determined to focus less on [clients] who simply don’t care about their own financial well-being. An initial offer and reminder is all they get,” he said. “Tax clients are certainly more transactional than my advisory clients, with whom I have a fiduciary responsibility. That doesn’t mean I don’t care about them, but when they become non-responsive to requests, I won’t push the issue.”

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