Millions of Americans are benefiting from lower federal income tax rates, yet an unusual number of them may be surprised to find they owe taxes when they file their 2018 returns.
To prevent this from causing you too much financial distress, it helps to know what's coming and how to prepare for it. (See TAX-R-US 2018 Tax Reform Review).
Why you might owe money - despite lower taxes
When federal income tax rates were lowered for this year, millions of workers started seeing more money in their weekly paychecks. They may also associate a tax cut with the probability of getting a tax refund next year. Instead though, changes in how paycheck withholding is being handled may result in more Americans owing money next tax season than in past years.
The sources of the problem include both how withholding instructions are given and the new tax laws themselves. Responsibility for providing withholding tables to employers was transferred from the Internal Revenue Service to the Treasury Department when the tax bill passed. In an effort to get those tables out to employers early in the year -- very soon after the new law was passed -- it seems the tables may not have fully accounted for all the complexities of the new law.
The Treasury Department estimates that 21 percent of Americans are being "under-withheld" -- that is, having less money withheld from their paychecks than they will likely owe. This is up from 18 percent who would have been under-withheld under the old system.
If a 3 percent difference in the number of Americans being under-withheld doesn't sound like a big deal, consider that over 150 million tax returns are filed annually. This means that there will be a few million more people owing taxes next April than would have been the case in the past.