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Last year’s Republican-backed tax cuts were sold as a big benefit to Americans, who would see more money in their paychecks. For many, that benefit may be short-lived when they find out they owe more to the Internal Revenue Services than they expected.
Last month, an IRS advisory panel suggested that the agency not penalize taxpayers who didn’t have enough money withheld from their paychecks this year — because their taxes may actually have gone up, not because they made more money but because of changes to the federal tax code, many of which were mirrored in Maine.
The Republican tax law eliminated personal exemptions and nearly doubled the standard deduction and put limits on deductions for mortgage interest and state and local tax payments. Other deductions were eliminated.
Nearly 30 percent of American taxpayers itemized their deductions. They no longer have that option after passage of the Tax Cuts and Job Act late last year.
“This may cause a significant number of taxpayers to be under-withheld when they file their 2018 personal income tax returns,” the IRS Information Reporting Advisory Committee said in its report last month.
If not enough money was withheld from their paychecks, these Americans would need to pay the remainder of the taxes owed when they file their returns, typically in April. They may also face penalties if they significantly underpaid their taxes. These are the penalties the committee suggests the IRS waive.
Maine Revenue Services issued an alert last month warning of the same problem because of the federal tax changes and the tax conformity legislation passed by state lawmakers in August. It is discussing waiving penalties as well.
How did this happen? Mostly, because the Trump administration wanted Americans to feel like they were getting a tax cut. This was important because most of the benefits from the tax bill flowed to corporations and wealthy Americans.
Shortly after the tax cut bill was passed in December, the IRS put out updated withholding tables for employers that were more a guess than based on thorough analysis of the impact of the law changes. This is because many employers don’t have all the up-to-date information needed to know how child care credits and other tax changes impact the tax liability of individual employees. Without this information, suggested withholdings could be inaccurate.
The IRS urged Americans to use personalized calculators to determine how much federal income tax they owe for 2018. Few people used the online tool to find out how much money they should actually withhold. The tool was also so complex that few people completed an assessment of how much they owed, the advisory committee said in its report.
As a result, many Americans will belatedly find out they owe more in income tax payments than they expect.
It is not too late to use the withholding calculator, found on the IRS website, to avoid a costly surprise in April.