We have received many questions in the past few months about income tax (payroll) withholdings and the new tax laws taking effect in 2018. The IRS has developed a Withholding Calculator which is available at www.IRS.gov but after reviewing it, I found it to be as confusing as when you completed your last W-4 at work. So here is an easier way to determine if you need to change your withholdings and what to change it to.
Note: As 2018 is about half over, any change you make now will only be in effect for half a year, so your withholdings may still be short.
To complete this exercise you will need:
- Your 2017 Federal income tax return – both pages of your 1040 long form and your Schedule A – Itemized Deductions form
- To know your current withholding election – such as Married with 3 exemption. This is usually listed on your paystub and might look like M, 3
- To know your spouse’s withholding election
- Any upcoming significant change in income in 2018
- A pencil, paper and calculator or a spreadsheet
- About 15 minutes
First, look at page 2 of your 1040, line 42 – Exemptions: write this number down.
Then, look at Schedule A, line 9 – Taxes You Paid – take this number and subtract $10,000: write this number down
Add these two numbers – This is approximately how much more income you will pay tax on in 2018 (over 2017).
Now look at page 2 of the 1040, line 43. Check the table below to see about how much additional tax you will have to pay:
Married Filing Jointly:
If Line 43 is under $77,400 you will pay 12%
If Line 43 is between $77,400 and $165,000 you will pay 22%
If Line 43 is between $165,000 and $315,000 you will pay 24%
If Line 43 is between $315,000 and $400,000 you will pay 32%
If Line 43 is between $400,000 and $600,000 you will pay 35%
If Line 43 is over $600,000 you will pay 37%
Single:
If Line 43 is under $38,700 you will pay 12%
If Line 43 is between $38,700 and $82,500 you will pay 22%
If Line 43 is between $82,500 and $157,500 you will pay 24%
If Line 43 is between $157,500 and $200,000 you will pay 32%
If Line 43 is between $200,000 and $500,000 you will pay 35%
If Line 43 is over $500,000 you will pay 37%
Head of Household:
If Line 43 is under $51,800 you will pay 12%
If Line 43 is between $51,800 and $82,500 you will pay 22%
If Line 43 is between $82,500 and $157,500 you will pay 24%
If Line 43 is between $157,500 and $200,000 you will pay 32%
If Line 43 is between $200,000 and $500,000 you will pay 35%
If Line 43 is over $500,000 you will pay 37%
Example: MFJ with one child
2017 2018 Worksheet
Line 42 12,150 0 12,150
Sch A Line 9 17,385 17,385 7,385
Additional 2018 tax 19,585
Line 43 164,372
Additional Tax in 2018 = 19,585 x 22% = $4,308
Now you have an idea of what your additional tax liability may be. How do you change your withholdings? Using the example you need to increase your federal tax withholdings by about $4,300. Each exemption is worth approximately $500. $4,300 divided by $500 is 8.6. So if you are married you both need to decrease your withholding exemptions by 4. If you were single, you would need to decrease your withholding exemptions by 8. The lowest exemption you can have is zero, but you can have an additional amount withheld from your pay each time.
Example: Your current withholding is M, 0. You need to withhold an additional $5,000. If you split this with your spouse, you would need to withhold an additional $2,500. Let’s say you are paid bi-weekly (26 pays per year), you would need to change your withholding to M, 0 with an additional $100 per pay period.