The 2017 Tax Cuts and Jobs Act (“TCJA”) changed tax withholdings for W-2 wage earners. Because the new law nearly doubled the standard deduction, employees had less withheld from their paychecks.

The required withholding on bonus payments, vested restricted stock and stock options also changed, from 25% to 22%. The problem is that a significant number of filers were under-withheld, due to the way in which W-4 forms were completed.

If a married couple each filed out their W-4 declaration as “married filing jointly” and each failed to mark the “withhold at single rate” box, the government software treated each as having their income reduced by $24,000 (or $48,000 combined for the married couple, instead of $24,000) and computed withholding accordingly. The result was an unintended under-withholding, and a reduced tax refund or unanticipated tax liability.

To reduce the risk of future under-withholding, married taxpayers filing jointly should review their W-4 declaration to confirm that the “withhold at the single rate” is marked for each spouse.

Taxpayers who anticipate additional income from non-traditional wage sources such as bonuses, stock vesting or stock option income should consider having more withheld.

Taxpayers who were used to deducting more than $10,000 in state and local taxes should also review their withholding, as the new law limits the deduction for state and local taxes (“SALT”) to $10,000.

Social Security withholding rates also changed – to 7%, 10%, 12%, or 22%. Social Security recipients with a marginal tax rate of more than 12% may need to adjust the withholding on their Social Security payments.

While the Tax Cuts and Jobs Act generally reduced taxes for most employees, care must be taken in completing the W-4 to avoid under-withholding, and additional attention is required for those with non-wage income.

As always, advice from a tax professional is recommended before completing W-4 forms or determining withholding amounts.

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