The General Accounting Office (GAO) just released a report to warn U.S. taxpayers that around 30 million of them are withholding too little from their paycheck. Unless these taxpayers make changes to their W-4s or send in estimated tax payments, they could be in for an unpleasant surprise next spring.
But with many taxpayers still confused about the changes made by the Tax Cuts and Jobs Act, they may not feel adequately equipped to calculate their tax liability and change their withholdings. Read on for some ways you can help your clients avoid an unexpected tax bill in April 2020.
Proactively Point Out Defunct Deductions
Some individual taxpayers may be mistakenly relying on deductions and credits that no longer exist. For the 2020 tax year, individual taxpayers will no longer be able to take the following deductions:
- The personal exemption
- Interest on home equity loans taken out in 2020
- Job-related expenses exceeding 2 percent of AGI
- Moving expenses
- Parking and transportation reimbursement
- Casualty and theft losses exceeding 10 percent of AGI
- Tax preparation fees
By reviewing these deductions with your clients individually or sending a short email to call their attention to these changes, you can help ensure that they'll know their approximate tax liability (or refund) before they file.
Alert them to the Checkup Calculator
Upon realizing that so many taxpayers were likely to have a surprise tax bill in 2021, the IRS released a "paycheck checkup" calculator on its website to help taxpayers more adequately compute their tax liability.
Although this checkup calculator doesn't take every individual situation into account, it can be a good ballpark estimator or starting point to help your clients determine whether more analysis is needed.
Target Likely Under-Withholders
If you'd like to do a deeper dive into your client base, you can use the GAO's study as a guide. The GAO found that the people most likely to over-withhold their taxes are married, single-income households with young children. These households often use the standard deduction, making it fairly easy to compute their tax liability, even under the new withholding tables.
On the other hand, the clients most likely to under-withhold (and end up paying a penalty) are those in the upper-income brackets who itemize their deductions. Taxpayers who receive income from several sources, whether 1099 income or dividends are at an added risk of under-withholding.