Hold everything: What clients need to know about new withholding rules

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Some clients, it now seems certain, will feel one of the Tax Cuts and Jobs Act’s most significant changes for 2018 in the spring of 2019: sticker shock on their tax bill or refund. And it also seems certain that preparers can do only so much warning.

“Taxpayers have not looked at their withholding for 2018. I’ve promoted them doing a tax check-up [but] many are going to be upset at the end of the year when they don't get a bigger refund or actually owe,” said Marilyn Meredith at Michigan-based Meredith Tax Service.

“I won’t tell them ‘I told you so,’ even though I should,” said Morris Armstrong, an Enrolled Agent and registered investment advisor at Armstrong Financial Strategies in Cheshire, Connecticut. “Through normal communications, it’s been suggested that they do a tax checkup on their pay stubs and no one really wants to do it, even for free. They don’t want to take the time. I’m hoping that April showers are avoided when they see their results.”

“We’ve been telling clients to check their withholdings but I seriously doubt people will,” said Patrick O’Hara, an EA in Poughkeepsie, N.Y. “It’s human nature to want more in your check but there will be more disappointment when they end up owing.”

The office of Kerry Freeman, an EA at Freeman Income Tax Service in Anthem, Arizona, called every client for a mid-year review of withholdings; only about 15 percent took advantage of this service. “I’ve found that many clients really don’t understand how withholding affects the tax return and are shocked with either the balance due or the refund,” Freeman said.

“We feel that most of our clients have not checked their withholdings for 2018 … We sense that many of our clients have been lead to believe the new tax law would be favorable to their overall tax situation but in reality may face a quite different situation,” said Gail Rosen, a CPA and shareholder with Wilkin & Guttenplan in Martinsville, N.J. “This, coupled with the withholding tables reducing tax withheld, should have them concerned. We’ve made a concerted effort to contact clients whose reduced withholding we project will not meet their actual tax liability for 2018.”

Many under-withhold

More than one in five taxpayers will under-withhold their taxes in 2018 under changes mandated by the TCJA , according to a recent report from the federal Government Accountability Office -- though the number of under-withheld taxpayers under the new law is only three percentage points higher than the GAO estimate of what it would have been under previous law (18 percent).

Some clientele seem more susceptible to problems with withholding. “I work in a high Earned Income Tax Credit neighborhood, and I believe most of my clients are expecting a bigger refund this year with no changes to their withholding,” said Rick Reynolds, an EA in Utica, N.Y. “I’m worried about my middle-class clients who have no children. Many of them are used to filing a Schedule A. With the new tax laws they may not have enough deductions. Couple that with them losing their exemptions and their refund will go down or amount due up. In that case,” he said, “I’d definitely tell them to adjust their W-4s at work – assuming they can figure out the new and complicated W-4.”

“Don’t know what I will tell them next time, especially if the new W-4 remains as it is in the last draft,” added Paul Knapp of Exact Income Tax Service, in Santa Fe, Texas.

“Many people always complain about the tax breaks that the wealthy have,” Armstrong said, “but I find that the higher-income people simply pay more attention to their tax situation – better records and compliance.”

‘Only one client’

The IRS has launched an awareness campaign urging all taxpayers to check withholding to head off a higher tax bill or penalty in 2019, reminding taxpayers that reform increased the standard deduction, removed personal exemptions, limited or cut other deductions, and changed rates and brackets.

Preparers have also tried awareness programs. “Our office discussed withholding with every client during this past tax season,” said Marilyn Heller Ayers, a CPA in Brick, N.J. “We used our software to take a look at how the new laws would affect their bottom line. In addition, we asked every client to contact us over the summer with updated paystubs so we can review their withholding and make sure they’re not caught off guard when we file their 2018 return. I think we are in good shape.”

“When I did clients’ 2017 return, I discussed the new withholding guidelines. In July, I sent letters to all of my clients … re-explaining that the withholdings for 2018 are significantly less and offered to do a withholding check free of charge,” said Kathy Hawboldt of Hawboldt’s Tax Service, in Louisville Kentucky. “Only one client has taken me up on the offer. When I do taxes for 2018, I’ll explain to clients that any surprises were expected and that’s why I sent the letter. I’ll also re-explain what I already told them.”

Laurie Ziegler, an EA at Sass Accounting in Saukville, Wisc., reviewed the withholding for any interested clients as part of completing 2017 taxes. “Through both our website and electronic newsletter we continue to encourage clients to have us do a projection,” she said.

“As part of my 2017 tax presentation, I printed a projected federal tax worksheet for 2018 showing the differences for them under the new tax laws,” said preparer Eric Hansen in Omaha, Neb. “Tried to be proactive.”

“Clients depending on me for payroll services have had their withholdings systematically adjusted. Those that do not have been accordingly advised,” said John Dundon, an EA and president of Taxpayer Advocacy Services in Englewood, Colorado. “Most follow through and have made adjustments, many have not. Those [finding] themselves surprised will be advised to engage my payroll services going forward.”

“A few clients have called and asked about their withholdings and how it will affect their 2018 tax returns. I asked them if they want me to do an estimate based on the projected income, withholding and deductions, and come up with a refund or balance due,” said preparer Andrew Piernock at Piernock Accounting and Tax Services, in Philadelphia. “Most of them, their refunds are much lower than 2017. I explain to them to change their W-4 and take out additional withholding. I definitely,” he added, “charge for this service.”

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