RICHARD FURLONG: Okay, so now we’re just past the top of the hour so let me get started and welcome you to our IRS presentation today on: “Understanding How to Use the IRS WithholdingCalculator to Check and Correct Withholding.” We’re so glad that you’re joining us today.
My name is Richard Furlong. I am a Senior Stakeholder Liaison at the Internal Revenue Service and it is my great pleasure to be your moderator for today’s web conference. Now today’s webconference will last 120 minutes and we will include a Q&A session with our subject matter expert. Before we begin the presentation, I’d like to ask that if you are with the media, please send us an email message at the address that you see provided on the slide right beneath my photo. I’m going to read that address to you because it’s very important that if you are from the media, we want to be able to engage you after the event. The address is: sbse.sl.web.conference.team@irs. gov. And you can see it there. Now, if you are with the media and you’re emailing us, please include your contact information and the news or media publication with which you are affiliated. One of our media relations or Stakeholder Liaison staff can assist or answer any questions you may have after today’s web conference. Now in case you experience any technology issues, this slide shows some helpful tips and reminders.
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Simply select the response you believe is correct by clicking the radio button next to your selection and then click “submit.” As a note, you may need to turn off your pop up blockers to receive these questions. If you do not get the pop up box for responding, please enter your response timely in the “Ask Question” feature so that our staff can track your participation at today’s web conference. And now it’s my great pleasure to introduce to you our subject matter expert today, Mr. Alan Plumley, who will be joining us to present today’s topic. Alan is a Technical Advisor in the Internal Revenue Service Office of Research, Applied Analytics, and Statistics. Alan’s expertise is in the areas of compliance measurement and modeling for efficient workload selection and resource allocation. He has also developed several online calculators to simplify taxes for taxpayers. Alan is a 33 year veteran of Internal Revenue Service research, and Alan earned his Ph.D. in public policy from Harvard University. So, Alan, let me turn the microphone over to you. It’s all yours. ALAN PLUMLEY: Thanks, Rich.
I’m certainly happy to be available today, and I appreciate the interest that people have in withholding and the calculator. So hopefully this will be not only informative but if it’s possible, maybe even a little fun. So I have two objectives today. One would be to illustrate why the major segments of the population really need to check their withholding and perhaps even change it, and then secondly to familiarize you all with how to go about doing that using the Withholding Calculator. So this becomes important, obviously, because of the changes that were enacted in the recent tax law change, which had a number of features that affected withholding. For example, the lower tax rates. And the increased standard deductions have almost doubled. The elimination of exemptions, very critical to withholding. The child tax credit was doubled from $1,000 per child to 2,000. And there is a new credit created for dependents who are too old to be qualifying for the child tax credit. So that’s a $500 per dependent credit. And there are a number of changes to itemized deductions, what is allowed to be deducted, thresholds and this kind of thing. And so all of these things have a bearing ontaxes, of course, but also therefore on withholding. So the new Withholding Tables that took effect in February were able to take into account many of these changes, for example, the new tax rate schedules, and they were designed to minimize the number of people who have to adjust their withholding on a new W 4. Another way to put that is to maximize the number of people who don’t have to adjust their W 4. So, one of the things that the Treasury Department was given some discretion about under the new law was the value of a withholding allowance given that the exemptions were eliminated, and that was chosen to be the same value as it would have had under prior law — 4,150. So the zero bracket amount that’s built into the Withholding Tables accounts for the standard deduction like it always has. It’s there, but now it’s larger.
And something that’s new here is that that zero bracket amount also eliminates personal exemptions, so that at least some people in simple situations don’t have to complete a new W 4 just to do that. RICHARD FURLONG: Well Alan, you know that answers a question that I’ve received early on back in the winter about the fact that with the elimination of the personal exemptions, a couple of my stakeholders were having trouble understanding how the new the Withholding Tables took that into account. And as you note, it tied into the zero bracket amount. Taken into account there. ALAN PLUMLEY: Right. So it used to be that people would just count how many people were in their household, on their tax return, and claim a withholding allowance for each of them. Because the value of the withholding allowance was the same as the exemption value. Well, it’s sort of the reverse of that that’s happening now, with the Withholding Tables, so that for single people, their zero bracket amount is actually being reduced by the value of one withholding allowance to accommodate the elimination of their personal exemption, and for the married Withholding Table, there are two allowances are taken away from the zero bracket amount, so that taxes start sooner than they otherwise would because those personal exemptions are being taken away. RICHARD FURLONG: Okay. Great. And I think we’ll see that more explicitly when we get into some of your examples a bit later. You know, while it’s early, Alan, I think we’re ready for our first polling question. ALAN PLUMLEY: All right. RICHARD FURLONG: And we’re a little sneaky here, so bear with me, but we would like to see how much everyone knows about this topic before Alan actually begins his deep dive into the Withholding Calculator. So our first polling question: And I’ll read it to you: “Whose withholding is most in need of adjustment because of the changes in the tax law?” A.
Those with dependent children B. Those who itemized deductions for tax year 2017 C. Those who will itemize for tax year 2018 D. Those who have more than one concurrent job E. All of the above And F. A, B and D choices So, you have six choices there. Whose withholding is most in need of adjustment because of the change in the tax law? A. Those with dependent children B. Those who itemized deductions for tax year 2017 C. Those who will itemize for tax year 2018 D. Those who have more than one concurrent job E. All of the above Or F. A, B and D So take a minute and then click on the radio button you believe most closely answers this question. Then we’ll stop the polling and share the correct answer on the next slide.
Okay. We can show the answer. There we go…the correct response is F. A, B and D. A – being Those with dependent children B – being Those who itemized deductions for tax year 2017 And D. Those who have more than one concurrent job. Any of those three factors would be the category of taxpayers most in need of adjustment due to the change in the tax law. So the correct percentage for this question was…let’s see if we can… It was 66%, Alan, two thirds. Well, not bad, because it was a little sneaky of us, I think, since you’re going to be getting into those three examples going forward. So, Alan, why don’t you now discuss: “Whose withholding may need adjustment?” ALAN PLUMLEY: Right, so that’s just an introduction to the three topics that we want to focus on here today. The first category of people are families with children, and it turns out they could either be over withheld or under withheld depending on their situation. And there are a couple of categories who could be significantly under withheld if they don’t complete a new W 4 and that would be those who itemized under prior law and high income individuals who have multiple jobs. So let’s take a look at those three in turn.
The first one is families with children. So, the change in the per tax benefit for taxpayers depends on what tax bracket they’re in, and the age of their children. But the benefit is greatest for those with lower income as opposed to those with higher income. And let’s kind of walk through an example here of the change in the benefit per child for a typical person in a given tax bracket from 2017. So, in the 10% bracket, for example, each dependent exemption which had the benefit of reducing taxable income by $4,050, each of those would have reduced tax by $405. And for someone in the 15% bracket it would have reduced tax by $608 and so on up to the 28% bracket it would have reduced tax by $1,134. RICHARD FURLONG: And Alan, if I may, let me just, am I correct that if I take 4,050, which was the dependent exemption for 2017 and multiply it, let’s say, by 28%, that’s how you come up with the $1,134 tax saving in that bracket? ALAN PLUMLEY: Right. Now, that does assume that both before and after the subtraction, the application of that dependent exemption, they’re still in the same marginal rate bracket. But, yes, it’s just multiplying the marginal tax rate by the 4050. And I might also mention here that higher tax brackets would likely have no tax value from the dependent exemptions because of the phase out of exemptions that happened under prior law. So I’m not even showing those. Okay, so that’s one child benefit under prior law, but in addition to that there’s a $1,000 per child tax credit. So this is not just an offset to taxable income.
It’s an offset to tax of $1,000. And it’s the same for every tax bracket. It’s a straight $1,000 off your tax unless it also is phased out. And so in the higher income brackets, it’s actually zero because of the phase out that occurred. So, it’s the sum of those two things that was really the benefit the tax benefit afforded to dependent children. Well, what about 2018?
Well, under the new law, there is no dependent exemption and the child tax credit was doubled from 1,000 to 2,000. And in addition to that, those who have older children or other dependents, like maybe elderly parents, there is a non child dependent credit of 500 per dependent. And so the landscape has changed quite a lot. Some things done away with, some things added, and the question is: What’s the impact on people? Well, let’s take a look at a specific example.
Let’s take a married couple with three children and they’re all under the age of 17, which makes them eligible for the child tax credit. Let’s say for this example that there’s one job, $90,000 of wages and no other income and they take the standard deduction. So focusing just on the children here. Well, they would have, under prior law, claimed 3 allowances in their withholding for the three dependent exemptions. And then for the credits, they would have been eligible for $3,000 of credit, which if they followed the instructions on the worksheets accompanying the W 4, they would be instructed to claim 5 allowances just for those credits, for a total of 8 allowances, or $32,400 worth of offset to their wages when it comes time to calculating their withholding. So if they were in the 15% marginal rate bracket, that $32,000 of wage offset and withholding would translate to a reduction of withholding of 4860. So that was under prior law. Now, under the new law, if they don’t file a new W 4, they’re still going to have those eight allowances on record with their employer and that would have accounted for $33,200 worth of wage offset under the new value of the withholding allowance. And they would probably be in the 12% marginal rate bracket which would then have a withholding reduction of 3984 rather than the 4860 that they had before. RICHARD FURLONG: So, Alan, this chart, the column “no new form W 4” is that assuming the person doesn’t move into a different withholding bracket when the new child benefits under the new law are taken intoaccount? ALAN PLUMLEY: Yes, all these examples, just to kind of make it simple, assume that with or without these child benefits the person would be in the same marginal tax rate bracket.
And many would be. Some would go from one bracket to another. And the same principle would apply but the numbers would be a little bit different. So the important thing here, though, is that if the person did file a new W 4 with their employer for 2018, they wouldn’t be claiming any allowances for dependent exemptions, that would be zero. But the credit – the child credit they would be eligible for would now be $6,000 and the W 4 would advise them to claim 12 allowances just for those credits. And that would correspond with a reduction to taxable wages of 49,800. And at the 12% marginal rate bracket, that would be a benefit, a reduction in withholding of 5976. RICHARD FURLONG: So excuse me, Alan, I want to make sure I understand this. And our audience may be looking at this. So with the new W 4 in your scenario, a couple with three children, all qualifying for the full $2000 child tax credit, if they, their new W 4 would have 12 withholding allowances rather than 8. ALAN PLUMLEY: That’s right.
That’s right. RICHARD FURLONG: Very interesting. ALAN PLUMLEY: And so the withholding benefit that they would be eligible for is if they just follow the instructions on the W 4, would be close to $6,000 on that bottom line there whereas if they didn’t file a new W 4 they would be getting the benefit, based on their prior withholding allowances, getting the benefit of about only $4,000 of reduction in withholding. So they would actually be eligible to have another $2,000 of withholding reduction if they were to have filled out a new W 4. RICHARD FURLONG: And that, of course, would translate into that much more in their paycheck for a full year. ALAN PLUMLEY: That’s right. RICHARD FURLONG: OK ALAN PLUMLEY: And certainly compared with last year it would be an increase. So RICHARD FURLONG: Well, I think we’re ready, I think we’re ready for our second polling question. That came up quickly. Now, so this one, I think I’m hopeful that the scores will be very high, Alan. “What determines whether your 2018 tax benefit for dependents is larger or smaller than it was for 2017?” Do you think the correct answer is… A. The number of dependents B. The age of the dependents C. Your tax rate bracket D. A and B E. All of the above I’m going to read that again and I’m going to give you a little more time this time to submit your answers. So the question is: “What determines whether your 2018 tax benefit for dependents is larger or smaller than it was for 2017?” Is the correct answer… A. The number of dependents B. The age of the dependents C. Your tax rate bracket D. A and B only, or E. All of the above So please think about that and then press the radio button with the answer that you believe most correctly answers thisquestion. Okay, I think if we’re ready to stop the polling now, we can share the correct answer on the next slide. And the answer is… E. All of the above. So let’s see. Do we know how many responded correctly here? It was much higher than before. I think it was just about 90%, Alan. So hold on, let me check, let me check the exact answer here. Oh it, actually, it was a little bit below that. So maybe we want to pause for a moment and explain why (e) all of the above is why the tax benefit is what determines the benefit for the dependents is larger or smaller, why all A, B and C together, Alan? ALAN PLUMLEY: Right. So, we talked about the age of the dependent depends influences whether they’re eligible for the child tax credit or the credit for other dependents, and so the age is very critical. Your tax rate bracket is important because not so much in the new year but it was very important under prior law, and so the change is going to depend on your marginal rate bracket. And, of course, the more dependents you have, the greater the change is going to be. RICHARD FURLONG: Right. I think the $2,000 child tax credit is only available for children who would qualify as dependents who are under the age of 17 at the end of year, but it’s a much smaller $500 credit for those dependents who are above that age. So I think that’s a new concept in the tax law,and that may be why some of the audience missed that. ALAN PLUMLEY: Right. So let’s put this into practical examples here and use the Withholding Calculator to help these people. So, again, as a reminder, our scenario here is they’re married, they’ve got three children, all of them are below 17. There’s one job, $90,000 of wages, no other income, standard deduction. So if this couple were to fill out the W 4 using the worksheets that accompany the W 4, they would be instructed to claim 15 allowances, two for themselves, spouses, one because they have just one job, and 12 for the three children. Accounting for the child tax credit. Now, the Withholding Calculator follows similar calculations but it takes into account things that the instructions that accompany the W 4 can’t take into account. And so one great example of that is how much have you had withheld so far this year and how much have you had withheld in your most recent paycheck? Those kind of things help to figure out whether the person is currently being under withheld or over withheld and to make any changes that would be necessary. So I’m going to show you an example where the calculator’s answers are basically the same as if they filled out the W 4. But that will depend on when it was when the calculator was run. The longer you wait in the year, the less time you have to make any corrections that might be necessary, and so the longer you wait, the more the answer is going to change on the calculator. And I would also emphasize that if someone does make a mid year change particularly using the calculator, then they really need to re check their withholding using the calculator the following January, because if they’re compensating in the second half of this year for under or over withholding in the first part of this year, then if they don’t change their withholding, they’re going to continue that over compensation throughout next year, and it’s much better to take a fresh look at full year’s worth of withholding next January and get things squared away. RICHARD FURLONG: So that explains why you have that is highlighted in red at the bottom there because we’re looking for folks to do a paycheck checkup now and mid year, but it’s going to be very important, if I hear you correctly, Alan, to do it again at the beginning of 2019? ALAN PLUMLEY: Right, unless the calculator says, you’re in pretty good shape, everything looks fine, you don’t have to make changes, then that will carry over to next year and you should be in good shape, but it’s a good practice because circumstances change.
And withholding may need to change accordingly, and it’s much better to think through those things in advance than to be stuck with a surprise at the end of the year with too little withheld or maybe too much. OK so let’s take an example – this example through to the Withholding Calculator. Now, one way to access the Withholding Calculator is to go to the IRS.gov home page and just enter the word “calculator” into the search field. Or you can go directly to it using the URL that is highlighted in yellow here. And what that does is it takes you to the landing page for the calculator. It’s not really the calculator, but it’s an introductory page that provides a lot of background information, some tips, and this kind of thing. If you scroll down on the landing page, as I’m doing here, this isn’t live, this is just a snapshot. I wish the software that allows our web conference to happen could actually show a live demonstration of the calculator, but I think we’re going to make out well with thesescreenshots. Anyway, if you scroll down, there’s several pieces of information here I wanted to highlight. One of them is that at the top, it lists some things to keep in mind before you go to the calculator. And so, for example, things that you would want to have on hand, like your most recent pay stubs. And for many people it’s helpful for them to have their most recent tax return in front of them so that any types of income or tax benefits like deductions and so on don’t escape them. Oh, yeah, I need to account for this and I need to account for that. And so that can be helpful. Now, next I want to highlight the important note that’s here. The calculator is pretty general. It accounts for a lot of things, but it doesn’t account for every possible tax situation. And I’ll give you some examples, like the alternative minimum tax, that’s not something that the Withholding Calculator addresses. It doesn’t address self employment tax, for example. If you’ve got a lot of self employment tax. Or capital gains tax rates, it doesn’t delve into that, but for people with straightforward situations, it takes care of everything that they face. Now, if someone does have one of these other specialized situations, what this note says is they can get answers to their withholding questions and work through their the amount that should be withheld using publication 505. And that’s also true of the instructions that accompany the W 4. There are cross references to Pub 505 for those kinds of situations. So at the bottom here of the landing page, it just emphasizes to users that the calculator helps them to fill out the W 4. They still need to submit that W 4 to their employer. And so that’s a good reminder. And then, finally, the landing page gives a rather big link or a button here to push to get to the calculator itself. So we’ll go ahead and do that. We’ll go to the calculator from here. And so the first page asks for two types of information. It asks for filing status and whether you can be claimed as a dependent by someone else. And for our example that we’re following here, this couple is married and, no, they cannot be claimed as a dependent by someone else. Now, this might be a good place to point out that wherever there’s an underlined word or phrase in the calculator, that’s an opportunity to click on that and pop up a bit of information, context sensitive information to answer questions or to provide further links to other IRS provided information to help people as they’re going through. RICHARD FURLONG: Alan, may I ask a quick question here, with the pop up, and this may be on the minds of many of our attendees. I thought the new tax law eliminated dependent exemptions but then we see the question: Can someone claim you as a dependent on his or her tax return? Maybe we should clarify. ALAN PLUMLEY: Yeah. So the new tax law didn’t eliminate benefits for dependents, in fact, we just looked at some benefits, the child tax credit and the other dependent credit. What it eliminated is the exemptions for dependents, which were reductions of taxable income to account for dependents. So dependents are still verymuch a part of the tax law and the benefits that are afforded to families, but they’re just they show up not so much as exemptions, but rather as credits in the calculation of tax. And, in fact, in this context, it’s not asking whether the user has any dependents themselves. We’re going to get to that on the next screen. But rather it’s asking whether they themselves could be claimed as a dependent because their tax situation is much different if they can be claimed by someone else as a dependent. Does that help? RICHARD FURLONG: Very good. Yes, it does, Alan. Thank you. ALAN PLUMLEY: OK so I wanted to point out here before we leave Page 1 of the calculator that what you enter on any given page affects the kinds of questions or the way they’re asked on subsequent pages. And so going forward in this example, all the pages are going to remember that this person is married filing joint and it cannot be claimed as a dependent on someone else’s return. So we click on “continue” and that gets us to Page 2 of the calculator, where we select the number of jobs involved with this taxpayer. And some other things about kinds of income that may apply to them and also the number of dependents they will claim on their tax return and so on. So in this particular example that we’re following, the person had just one job the couple only had one job, and they had three children. And so they indicate that here with these drop down menus, one job and three children. None of these other specialized things apply to them, and they’re under the age of 65, so none of those things apply to them, so they can scroll down to bottom part of this page of the calculator and they see more things that can be entered in their particular situation, they are eligible for some credits. In fact, they would enter “3” when asked about the child tax credit. All three of their children are under 17, and so they would select “3” from the pull down menu. And in terms of the earned income tax credit, all three are under the age of 19, so they would select “3 or more.” That doesn’t mean they’re actually going to get that credit, but they have children who are qualifying under those rules. Whether they’re going to be eligible for it will depend on income and other things that will be entered later. So those are really the only two things that apply to the fictitious couple in our example. They can leave everything else blank or just the default answers. And then they click “continue” to go to Page 3. And here’s where they enter their wages. In our example they have $90,000 of wages or salary. The second box is any bonuses they expect to receive, and let’s say they don’t expect any, they typically don’t have any. And then the third box here it says enter the total federal income tax withheld to date in 2018. And so they look at the most recent paystub and they find that they were they’ve had $700 already withheld. And then secondly, enter the federal income taxes withheld from your last salary payment. So in their last pay period, they had $100 withheld. And they enter that there. And they indicate with the pull down menu that they are paid every two weeks, the frequency is important here. And the last two on this page allow them to indicate how long they have been or will be in this job during the present year. And so the default is they’ve been in the year they’ve been on the job all year from January 1 to December 31, but if they entered the job, the current job, later in the year, they could indicate that from the pull down, or if they expect to no longer be on this job sometime before December 31st, they could indicate that. And the calculator will take that all into account. RICHARD FURLONG: Alan?
ALAN PLUMLEY: Yes? RICHARD FURLONG: So, A and this is an important screen for getting it getting it the paycheck checkup correct. So the 90,000 is not the 90,000 from the 2017 return, it’s a projection of what they expect to receive from 2018 as indicated there…
ALAN PLUMLEY: That’s right. RICHARD FURLONG: But the total federal income tax withheld to date presumably would be from their most recent paycheck showing year to date and then also forthe most recent pay period. Now why is that so important for the Withholding Calculator to have that last paycheck stub paystub I should say, showing the withholding to date from the last paycheck? ALAN PLUMLEY: Right. Unlike the instructions that accompany the worksheets and so on that accompany the W 4 itself, the calculator can take into account where you are in the present year, and so it asks how much has been withheld to date, what kind of trajectory are you on this year, and it can therefore calculate whether they’re on a trajectory to be under withheld, in which case we need to correct that, or whether they’re on a trajectory to be significantly over withheld and they may choose to change that. This is what allows the calculator to do that. RICHARD FURLONG: It’s a very dynamic tool indeed, because as you say, it’s self correcting or it’s adjusting for the actual day that you’re inputting this data. ALAN PLUMLEY: Right. RICHARD FURLONG: And how far into the year one is.
ALAN PLUMLEY: Yeah, you could be depending on the pay frequency, you could do it again next week and get a slightly different answer because it’s always updating. RICHARD FURLONG: Thank you. ALAN PLUMLEY: So once the person has entered this basic information, they scroll down to the bottom part of Page 3 of the calculator where they can enter any non wage income that they have in several categories here. It could be, you know, interest and dividends or maybe some cash wages or tips or something like that. In our scenario that we’re following, none of these apply, so the user can just leave these blank. There’s also an opportunity for them to take into account adjustments to income as would be reported on the 1040, at the bottom of the 1040, but in this case let’s say they have no adjustments to income to take into account.
So they could just leave the rest of this all blank and press “continue” to go to the next page. And the next page is where they enter any itemized deductions they would have. So it confirms at the top here that your standard deduction, in their case, because they’re married, is 24,000. And here is an opportunity for them to enter any itemized deductions they would have, particularly if they anticipate it’s going to total more than 24,000, but in our scenario, we said that they were they take the standard deduction, and so they can just leave this completely blank and press “continue” to proceed to the final output on the calculator. RICHARD FURLONG: Alan, may I ask you about that box on that screen. If you want to use your itemized deductions to calculate your withholding, your withholding, even if the amount is less than your standard deduction, check the box, why would one do that? ALAN PLUMLEY: Here are a few situations where people are required to itemize even though on the surface of it, it doesn’t look like it would be advantageous to them to do so, and I guess the most common is if they’re married filing separate and their spouse’s return itemizes, then they’re forced to. It’s there in case people have to do it, but generally speaking what the calculator does is, even if they don’t check that box, they enter some amounts that are less than the standard deduction, it will give them the benefit of the standard deduction unless they check that box. RICHARD FURLONG: Okay, that addressed the second question I was going to ask you. So, if they don’t check off the box but put in, let’s say, their state and local taxes, it will not it will still give them the standard deduction of, in this example of $24,000 because they did not check that box. ALAN PLUMLEY: It would give them the 24,000 if the sum of all their itemized deductions is less than 24,000. RICHARD FURLONG: Is less, yes, thank you.
ALAN PLUMLEY: Right. Okay. So they click “continue” to go to the output page, and there are a number of things here I wanted to highlight. One is just the basic result. This particular taxpayer is being over withheld slightly. The calculator says, based on the information you previously entered, your anticipated income tax for 2018 is 1542. If you do not change your current withholding arrangement you will have 2500 withheld for 2018 resulting in an overpayment of $958 when you file your return. If you want your withholding to more closely match your anticipated tax, adjust your withholding on a new W 4 as follows. And so here’s where it recommends the 15 allowances to get them pretty close to where they need to be, and if they do that, and, of course, also check the “married” box on the W 4, if they do that, the calculator says that based on the information you entered, if you file a new W 4 for the rest of 2018, the expected refund to which you may be entitled should be around 275. So they’re being over withheld. If they make this adjustment for the balance of the year, they’ll still be over withheld but not by quite so much. RICHARD FURLONG: So, Alan, in this example, if the couple prefer not to reduce their 2018 refund from $958 to 275, they really don’t have to do anything. ALAN PLUMLEY: Right. If they’re satisfied with that, then it just confirms it’s sort of the magnitude they’re comfortable with and they can just leave well enough alone.
RICHARD FURLONG: Okay. Great. ALAN PLUMLEY: So, on the other hand, if they do make a change, I wanted to highlight here again, among the tips that are on this results page, the third one there says, be sure to review your withholding at the beginning of 2019 or any time there’s a change in your tax situation. Much as we highlighted before, that if they do make a change now, it’s always good practice to double check their withholding at the beginning of the next year so they can set their withholding for a full year and not need to make a mid year adjustment unless their situation changes. So, if they scroll down on the results page here, they have a confirmation of many of the major inputs that they provided to the calculator, the handy reference. It also provides the date that they used the calculator. I did this on April 9th. So that’s provided here. And so because of the nature of the information here, this is a good time, perhaps, to point out that it’s good to print out a copy of the particularly the last page of the calculator as a record. So they’ll know what the recommendation is, but they’ll also have a confirmation of what the inputs were and when the recommendation was made. So that’s a fairly simple use of the calculator for a very common situation. Okay, let’s then go to our second major category of people who really should check their withholding, and that is people who itemized under prior law. Well, since the standard deduction has always been built into the Withholding Tables, and still is, then the instructions for itemizers on the W 4 worksheet is to claim withholding allowances for the amount of itemized deduction that they expect to have that exceeds the standard deduction. So the allowances that they claim are tied very directly to the excess amount over the standard deduction. Well, since the standard deductions have almost doubled, if people’s itemized deductions even were the same as what theyexperienced before, then the number allowances they should claim for those itemized deductions should be decreased often because the amount that is in excess of the standard deduction is muchless. Because the standard deduction has doubled, almost. So a lot of people who are used to itemizing, even if they no longer will itemize in 2018 yeah, 2018 they should adjust their withholding because otherwise they will be under withheld. So let’s take an example of that.
Again, we’ve got a married couple. In this case, no children. I just want to focus just on the itemized deductions. And they’ve got one job, $90,000 of wages. No other income. But here they have $29,000 of itemized deductions. Well, in 2017 they would have claimed four allowances because for the itemized deductions — because they would have had $16,300 worth of itemized deductions in excess of the standard deduction that applied in 2017, and that $16,000 represents is represented by more four allowances, which are each worth about $4,000. So the income that would be offset by those allowances is $16,200, and at the 15% marginal rate, that would have been a tax withholding benefit of $2,430 in 2017. So if they did not file the new W 4 for 2018, those same four allowances would be active in their withholding during 2018 and those would have corresponded to $16,600 of wage offset in their withholding. And at the 12% marginal rate bracket that they’re now in, that would translate to just under $2,000 of withholding offset by these deduction allowances. Well, what would happen if they filled out a new W 4 for 2018? Well, because the itemized because the standard deduction now is much larger, it’s 24,000, they’ve only got $5,000 over that standard deduction amount to account for through their withholding allowances. And because the withholding allowance is 4150 each, it’s really only one allowance they should be claiming now for itemized deductions. And at the 12% marginal rate bracket, that would be a withholding offset of just under $500, 498, which means that if they don’t complete a new W 4, then they’re going to be having around $1,500 too little withheld, purely because standard deduction has about doubled and it’s already accounted for in the Withholding Tables. So itemizers, that’s a fairly large group of people, they would be well advised to fill out a new W 4. RICHARD FURLONG: Indeed. This example is a real eye opener to me, Alan, because as familiar as I am with itemized deductions, I would not think that just because of the increase in the standard deduction for a couple in this scenario, the impact would be so significant if they didn’t change their withholding. So this is a great example. And I think after we get to the next polling question, you’re going to cross walk us through this example to the Withholding Calculator. ALAN PLUMLEY: Right. RICHARD FURLONG: However, before we do that, I think we’re ready for our third polling question, which ties with thesegment Alan just discussed. So the question as you can see there is: “Why should those who itemized in 2017 reduce their withholding allowances in 2018 even if they will no longer itemize(…because of course there’s an increased standard deduction that may be more beneficial for them?) So do you think the correct answer is… A. They shouldn’t reduce their withholding allowances at all, or B. Withholding allowances depend on the extent to which itemized deductions exceed the standard deduction, or C. They’ll have too much withheld if they don’t do so So now, please take a minute to think about the question and the answers and then click the radio button you believe most closely answers this question. Again, I’ll repeat the question.
“Why should those who itemized in 2017 reduce their withholding allowances in 2018 even if they will no longer itemize due to the increased standard deduction? ” Is the answer… A.
They should not reduce their withholding allowances at all B. Withholding allowances depend on the extent to which itemized deductions exceed the standard deduction, or C. They’ll have too much withheld if they don’t do so So take a moment to answer. I’ll give you another couple of seconds. And then we’ll show the correct response. The correct response is B. Withholding allowances depend on the extent to which itemized deductions exceed the standard deduction And, so let’s see how you did on this one. If we can tabulate the results here. Okay, not bad. 86%, Alan, answered B correctly. So that’s pretty good. I think the overwhelming majority of the attendees were following along and they caught that key point that you were emphasizing that because the standard deduction has essentially doubled, the difference between the value of itemizing above that and the standard deduction has gone down. So very good. So how about taking us to an example of cross walking to the Withholding Calculator for itemizers, Alan.
ALAN PLUMLEY: All right. So again, our scenario is married, no children, one job, $90,000 of wages, no other income, but they’ve got $29,000 of itemized deductions. And so if they complete the worksheets that accompany the W 4, they would be instructed to claim four allowances, two for the spouses, one for the single job, and one for itemized deductions. That’s for 2018. The Withholding Calculator will, in the example that I’m going to show you, actually, recommends they claim only two allowances because of what we’re going to assume about their under withholding to date. And this is how the calculator differs from the paper worksheets. It takes into account what trajectory they’re currently on and tries to make adjustment for the balance of the year. And again, if they do make adjustment for the balance of the year, they need to revisit the calculator the following January or as early in the year as possible so that they can set up their withholding for a full year scenario, not just a corrective scenario at the end of this year. So, we go to the calculator. Like we did before, again, it’s married/joint, cannot be claimed as a dependent. They click “continue.” And get on Page 2 where they have only one job. And this example, they have no children. So they leave the drop down box there at zero. None of the other income or age things apply to them, so they can leave those blank. They scroll down and here again, because they have no children and there’s no credits involved, they can leave everything here blank or at the default drop down setting. And they click on “continue” to go to Page 3 of the calculator, where they enter again their $90,000 of wages, no bonus anticipated. But here their withholding, to date, let’s say, was 1505, and they had 215 withheld from their last paycheck. This is federal income tax. And let’s say they’re paid every two weeks and it’s a full year job. And so then they scroll down to the rest of Page 3 of the calculator. They have no other income to take into account, nor do they have any adjustments, so they can just click continue to Page 4 of the calculator. And here, now, they do enter information because they have itemized deductions. So let’s say, for example, they had $10,000 of state and local taxes. Another $10,000 of interest they paid, presumably mortgage and so on, and $9,000 of charitable contributions. RICHARD FURLONG: Alan… ALAN PLUMLEY: Totaling 29,000. Yes? RICHARD FURLONG: Alan, I apologize for interrupting, but I wanted to ask you about the taxes, because we know under the new law, the itemized deduction for state and local taxes is capped at $10,000. What would happen with the Withholding Calculator if I were to enter in, let’s say, $15,000 in the box for taxes you paid? ALAN PLUMLEY: You could enter that, but when you press “continue” it won’t let you continue. It’ll pop up an error saying, no, the maximum is 10,000, and then you’re able then, after you get past the error message, you can go back and enter 10,000 as a correct alternative and then you can proceed with “continue.” So it does tell you that. RICHARD FURLONG: Okay, great. Thank you.
ALAN PLUMLEY: So, in this case they’ve entered all their itemized deductions, they press “continue,” and they get the results. And here it says based on your information your anticipated income tax for 2018 is $6,942. If you do not change your current withholding arrangement you will have $5,375 withheld for the year leaving $1,567 due when you file your return. And so you should adjust your withholding as follows. And so the recommendation is to claim two allowances and, of course, check the married box on the W 4. So, they’re eligible for more allowances but claiming only two will compensate for the early under withholding, the first part of the year, so that they’ll be slightly over withheld in the second part of the year and the end result by the end of the year, it says here, is based on your information, if you file a new W 4 according to this recommendation, you should be in a position to have a refund of about $125. So instead of being under withheld significantly, they would be in a refund posture. RICHARD FURLONG: And, Alan, as you noted earlier, you ran this calculation, I think, at the beginning of April, April 5th if I’m correct. If one were to do these numberstoday in almost mid year, they would be even more under withheld, unless they made adjustment.
ALAN PLUMLEY: That’s right. And so they would be more under withheld and therefore the amount of the adjustment would be larger and the time within which to apply that adjustment is now decreasing, because there’s less of the year remaining, and so it becomes a more significant adjustment at that point. So earlier is better. RICHARD FURLONG: And again, if they were to adjust to ensure their withholding gives them the proper withholding for the entire year based on the additional withholding in the latter half of the year, as the point you made at the outset, which I think bears repeating, they should go back and do the Withholding Calculator at the beginning of 2019 to make another correction or adjustment possibly. ALAN PLUMLEY: Yes. And so, again, we have that tip here on the bottom of the output page. Be sure to review your withholding at the beginning of next year. That’s particularly necessary if they make a change mid year in the current year. All right, so let’s go to our third category of people, our third and final category. And that’s people who have multiple concurrent jobs. And so that means an individual who holds more than one job at the same time. It could also mean a married couple, each of whom works simultaneously in a job. And the reason for that is that since the standard deduction is built into the withholding tables, it’s applied to each job.
Even though they’re eligible for just one standard deduction on their tax return. So the withholding tables, the whole withholding system is built around the assumption that each job is by itself, and if you have more than one job in the household, then we need to take special precautions. And that’s because there are two reasons. One, because the standard deduction is built into each job’s withholding to get the benefit of it twice, if they’ve got two jobs.
But there’s a second reason as well. And that is that the withholding on the second job is being withheld, again, as if it’s the only job around, and so it starts at the very lowest tax bracket, when in reality their actual tax liability is calculated based on the combination of the two jobs, and so the second job really should be withheld at the higher tax bracket of the first job. And because it’s not, they’re under withheld for that reason as well. Well, both of these things happened before, but it’s even a bigger problem now because the standard deduction that’s given to each job has almost doubled. And so it’s definitely something that people with multiple jobs in a household need to check. Now, it turns out that those most in need of adjusting their withholding in this situation are those with moderately high or high income as single taxpayers, and there are a number of reasons for that, but I wanted to walk through an example of what this looks like. So let’s assume we have a single with no children and he’s got two jobs, one of them is 155,000 and another is 40,000 of wages and to keep things focused and simple here, let’s assume no other income, and also he takes the standard deduction. So this is all about the two job situation. Well, in 2017 because the standard deduction is given to both jobs in the Withholding Tables, he would be under withheld on theorder of $1,562. And because the second job is withheld starting at the lowest tax bracket rather than the marginal bracket of the…in this situation he would be under withheld by an additional $2,181. And so the W 4 would have advised him to claim zero allowances and to have an additional 4,520 withheld over the course of the year to compensate for these two sources of under withholding. And the end result of that would have been a refund on the order of $777. Now that was 2017. So if the taxpayer doesn’t complete a new W 4 for 2018, he’s going to still be claiming those zero allowances, and on line 6 of the W 4 he’s going to claim the per paycheck counterpart of 4,520, the 4,520 as an annual amount, and the amount that goes on line 6 of the W 4 is the additional amount to withhold per paycheck, and the end result of that in 2018 would be that he would be under withheld still by $563. Even though he was accounting for it well in 2017. Well, if he had completed a new W 4 in 2018, he would have a larger amount that would need to be withheld in addition to claiming zero allowances. And so he could follow the instructions on the W 4 worksheets and they would advise him to have an additional 5,320 withheld over the course of the year, and that, as it turns out, would result in a slight under withholding of $163, but clearly $800 less under withholding than he would have had had he not completed a new W 4. RICHARD FURLONG: Right, I think that’s important and it strikes me that he’s not getting the refund even with the new W 4. He’ll owe $163 if he filled it out at the beginning of the year, but it’s less of a surprise, less painful than owing almost $1,000 if no new W 4 was completed, Alan. ALAN PLUMLEY: Correct. And so you might be wondering, well why would the W 4 worksheets, using those, end up in a balance due situation? And the answer is that the whole withholding system and certainly the W 4 and the worksheets and so on that accompany the W 4 are seeking to achieve a balance between accuracy and simplicity. So the more accurate we make the W 4 and the whole withholding system, the more complicated it’s going to get. And so some people are going to be slightly over withheld; some people are going to be slightly under withheld. And this is a good opportunity to mention that the calculator achieves that balance between accuracy and simplicity by hopefully improving on both fronts, both more accurate, and more simple for most users. And so we’ll look at an example here eventually.
RICHARD FURLONG: Yes, and before we do that, before we do the crosswalk, using this example to the calculator, let’s have our fourth and final polling question for today. So the question is: Why are those with two or more concurrent jobs likely to have too little withheld? Is the correct response: A. The withholding tables give the benefit of the standard deduction to each job B. The withholding tables assume that there are no other concurrent jobs, or C. Both A and B So, again, I ask you, take a minute, think about the question and the answers and then click on the radio button that you believe most closely answers this question. Again, the question is… Why are those with two or more concurrent jobs likely to have too little withheld? Is it… A. The withholding tables give the benefit of the standard deduction to each job B. The withholding tables assume that there are no other concurrent jobs, or C. Both A and B And we’ll give you a few more seconds to make your selection. And then we can stop the polling. And on the next slide we’ll show you the correct answer. And as you can see, it is… C. Both A and B So both factors can contribute to too little withheld for those with two or more concurrent jobs. So let’s see what the results are here. And we had just under 80% got this correctly, Alan. So it’s conceptually a little challenging, but I think the fact that, if everyone understands the takeaway, if you have in your household, two or more concurrent jobs, you have to be very careful about accurately completing your withholding, and the Withholding Calculator can go a great way to assist you in that regard. ALAN PLUMLEY: Right. So, let’s run through an example here using the calculator. And again, you’re familiar with the scenario here. Two jobs, standard deduction. Using the W 4 worksheets and instructions, you claim zero allowances and have an additional 5,320 withheld over the course of the entire year. Using the calculator, it depends a whole lot on how much they have had withheld so far, what trajectory are they on? And so I ran this on April 9th, and the recommendation was to claim zero allowances and have an additional 4,975 withheld over the balance of the year. And, again, if they make a change to their withholding in the middle of the year, it’s always good practice to revisit that next January so they can set themselves up for a full annual pattern of withholding that keeps them on target. Okay, so we go to the calculator, and in this case the person is single. And they cannot be claimed as a dependent.
They click on “continue.” It takes us to Page 2. And here they enter two jobs. That’s the scenario we’re looking at. None of these other income kind of things apply to them. This taxpayer has no children, so there’s nothing there either. And they scroll down to the bottom of Page 2, they have no children, they’ve got no credits, so none of this applies. They click on “continue.” To go to Page 3 of the calculator, and now you see that they have columns for each of the two jobs. They enter the wages for Job 1 and wages for Job 2. Neither of them expect bonuses. And you enter very specifically how much has been withheld, to date, for each of the two jobs, so 6936 for the one job 3500 for job 2 and how much was withheld from the last paycheck, 993 for job 1 and 500 for job 2. And as it turns out both of them are withheld every other week, and they’re full year jobs, and so we don’t need to change those. We scroll down and, like in the other scenarios, there’s no other income that they need to account for in this scenario or adjustments. And so they can click “continue” to go to Slide 4 of the calculator where they would enter itemized deductions, but in our example this is not an itemizer. So they would just click “continue” to get the results. And you’ll notice that the results say that based on your responses, your anticipated income tax for 2018 is 38,650 and if you don’t change your withholding arrangement you’ll have 37,310 withheld leaving 1,340 due when you file your return. And to meet your anticipated tax, change your current withholding arrangement by claiming zero allowances plus an additional amount of 4,975 that they withheld over the course of the year. RICHARD FURLONG: And Alan? ALAN PLUMLEY: Yes. RICHARD FURLONG: And just to ask what may be an obvious question, the 4,975 could be split between either of the two jobs between both of the two jobs or either of the jobs, as long as an additional 4,975, based on the date you did this calculator or the Withholding Calculator did the calculations was added to the withholding on one or both of the jobs? ALAN PLUMLEY: That’s right. And so as you see here, the calculator recommends how to split that between the two jobs, and it uses just the assumption that it should be proportional to the relative magnitude of the wages from the two jobs. There’s nothing special about that. All of it could be withheld from one job, if there’s enough wages withheld from that job. But it’s just a suggestion to the taxpayer that’s provided here by the calculator. And…it also says that based on your information, if you file a new W 4 using this information, your withholding will approximately equal your anticipated tax and any refund or balance due should be less than $25. So it puts them very close to what their actual tax would be. RICHARD FURLONG: So, Alan, just I want to make sure I have all the facts here. If this hypothetical wage earner, two jobs, standard deduction, no dependents, did nothing, the calculator would show he’d have a balance due of just over $2,900, 2924 I think you showed, yet the calculator is recommending an additional 5417 to be withheld going forward, and that will result in a very small de minimis refund of less than $25. Again, how does that result come about? How can you have so much more withheld than your expected balance due and still have the correct amount being withheld? ALAN PLUMLEY: Actually, the expected balance due was 1,340 and we’re recommending to have an additional amount withheld of 4,975. RICHARD FURLONG: Right, I see it now. Yeah. ALAN PLUMLEY: Again, it’s all about the information that the employee would provide the employer using the W 4. So on Line 5 of W 4 they indicate how many withholding allowances to claim for withholding.
In this case it’s zero. On line 6 of W 4, it asks you to enter how much in addition you want withheld. So that “in addition” is in addition to what would be withheld with zero allowances, and only zero allowances. And so the calculator is saying, okay, claim zero allowances, that’s going to result in a certain amount of withholding. In addition to that, enter on Line 6 the per pay period equivalent of 4,975. And so it’s not in addition to the current trajectory this person is on. It’s in addition to only claiming zero allowances because that’s what’s needed on Line 6 of the W 4. RICHARD FURLONG: Great. Now I think I have it, thank you. ALAN PLUMLEY: Okay. That is a common point of confusion, and so it bears repeating there. Okay.
So that’s an example of changing it to account for under withholding, on account of multiple jobs. And, again, if they change their withholding midyear, you know the routine here, they need to check it next January to get themselves set up for a full year worth of withholding at the correct rate. Okay. So I wanted to point out in closing just some other features, some of which we’ve highlighted and illustrated with the calculator. It allows for some other types of income. We haven’t delved into those so much. They’re available for people to take into account, whether it’s interest or dividends or other specialized kinds of income. And even other kinds of offsets to income, like adjustments. It also accounts for withholding, to date, which was very helpful for mid year adjustments, the instructions and worksheets that accompany the W 4 can’t do that, so the calculator is very helpful mid year. And it accounts for part year jobs, which the W 4 instructions and worksheets can’t do. And so if they have a summer job, it’s much easier to figure out what their withholding situation should be. And it also has built into it various checks to prevent users from entering unallowable orinconsistent amounts. And we talked about one of those, the $10,000 limit on state and local deductions, but another example would be if they claimed the head of household status on Page 1 but they didn’t enter any dependents on Page 2 of the calculator, they would get an error message saying that’s inconsistent until they change their filing status or they need to account for a dependent. So it’s just to keep things consistent and accurate.
