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Problem Discovered in Tax Bill Will Leave Many Owing the IRS Big Next Year

It’s going to be a cold winter next tax season if people don’t prepare for the antics of Congress and the IRS.

A major tax bill late in the year followed by a bill of extenders February 9th and we have the perfect recipe for problems.

My initial reaction to the tax bill in December was that most of my clients would see some benefit since my clients tend towards the upper end of the income scale. I also have lower income and older clients who are not benefiting as I expected. Certain taxpayers are even seeing a tax increase, most notably, those with large unreimbursed employee business expenses like on-the-road sales people and rock band members.

The tax software used in my office estimates what the new tax rules will mean for clients if the rules applied to their 2017 return. This has been a powerful planning tool early in the tax season. But as an accountant I always look under the hood and when I did found a disturbing problem.

From Joy to Tears

Taxes cause pain in two ways. First, the actual tax dings the household budget. Second, if not properly prepared for the changes, the timing of when the remaining taxes are paid can cause exquisite pain.

Adding to the mess, the IRS didn’t have time to update withholding tables until the end of January. Most clients didn’t see a change in their paycheck reflecting the new tax law until their first paycheck in February.

Also problematic is the issue of exemptions. For this calendar year personal exemptions are eliminated while the standard deduction is increased. As expected, this change was a big yawn for most clients. A few were able to capitalize on this particular change.

Without exemptions it is harder for the IRS to estimate the tax liability of household size. Yes, the child tax credit has been increased and the phase-out level pushed higher, but the age of the child and if they attend college now plays a bigger role than in the past.

Late January and early February tax returns delivered in my office presented our estimate of how the tax change will affect the client. A few people saw a tax increase, but most had either a small change or a larger refund.

One thing bothered me as we shared the news. I worried how the updated withholding tables would affect my results. I warned clients my estimate assumed everything was exactly the same as their 2017 return when we know the updated withholding tables would mess with my estimate.

Now that we are on the backside of February and most clients picking up in the last week have seen a paycheck with the new withholding, I can ask an additional question: How much did your paycheck change with the new withholding?

I expected a modest adjustment to my software’s estimate. What I got made me light-headed.

Every single client I met in the last week or so with a new withholding amount is under withholding by a large margin! People expecting a $3,000 reduction in their tax bill are seeing a $4,000 or more reduction in withholding. Clients who already owe money or like to keep it close to breakeven are in for a rude surprise if I don’t intervene.

An Imperfect Solution

I have a solution to fix the problem, but it entails a lot of screwing around. You can either reduce your exemptions on your W-4 or fill in an extra amount to be withheld each pay period above the withholding table amounts.

Unfortunately, most people don’t have a clue what is about to hit them. If their accountant doesn’t figure this out fast they will be steamrolled next tax season when the miscalculation bites. DIYers are at greatest risk as they tend to believe what the computer tells them. Computers are great for grunt level computing in preparing a tax return, but ill equipped to fix this new problem.

Here is what I consider the only appropriate option. When tax season is over you need to speak with a tax professional that is willing to crunch the numbers by hand to adjust for the tax and withholding changes. There is no other way.

My guess is online programs will become available as the year goes on. It still requires taxpayers to understand they even have a problem.

A Busy Off Tax Season

Tax professionals will be busy this year. I can’t imagine 140 million people are going to show up at the tax office this summer. First, many tax offices close or have reduced staff over the summer, and second, tax offices will focus on their regular clients if they address the issue at all. About half of taxpayers prepare their own return. Next spring, after the mid-term elections, taxpayer will have a hangover from the antics of Congress and the IRS. The reduced refunds and increased balance dues could chill the economy. (At least the guys who created the mess got re-elected. Man, if they lost their cushy government jobs they’d be unemployable, except as lobbyists.)

Prepare your own taxes and support your favorite blog at the same time. What could be better?

Your favorite accountant already has a plan. Originally I planned on reviewing all returns in my office with a business or income property. If we find an issue we’d give the client call to set up a meeting. This has been expanded to all clients! I estimate I’ll communicate with 600-700 clients over the summer out of a book approaching 1,000.

Readers of this blog will also feel uneasy as my discovery is copied by other news outlets. (Note to news outlets: Let your readers know where you learned this nugget of information as a gift to a wayward accountant from Backwoods, Wisconsin.) My regular clients have preference. Openings in my schedule are available to non-clients. That means most of you, kind readers.

It’s nothing personal. I have to focus my time as it will be at a premium this year. The amount of tax planning necessary this year will trump (pun intended) anything I’ve experienced in my 36 year career. The business income deduction alone would be enough for a comfortably busy summer. All these extra issues will overwhelm any tax office brave enough to remain open after April 17th.

I’m not bailing on you guys! Normally I block one day per week for consulting. This year I will open two days per week with the option some weeks for a third day. Keep in mind consulting takes prep work before we speak. I need to see your 2017 return and any expected changes.

To make this work will require specialized training in my office so I’m not a lone soldier. As a lone wolf I’d never make it through my client list, not even considering even one non-client from my list of awesome readers.

Late April will be a recovery period as I train and take some time with family. Clients reading this can set a summer appointment already. Some have. Clients picking up from now to the end of tax season will be reviewed for a summer appointment.

From May 1st on it will be full speed forward with consulting and tax planning. Clients with a business and landlords really need to make it a priority to see me this summer or fall.

How Much of My Tax Savings are Going to You, Mister Accountant?

And then we get to fees. In my office I will charge a flat $50 for clients to have their withholding reviewed. Before you pay me a cent (or I do a stitch of work) I’ll pull up your file to determine if a review is warranted. If it makes sense for me to review your records I will. If it is obvious you don’t have a tax issue I’ll inform you so you can save fifty bucks. Retired persons and those with low income generally fall into this group.

Businesses and landlords all require a review this year no matter what! There are too many additional moving parts to abscond a detailed review. My hourly fee will apply. I doubt anyone will lose on the deal as the advantages this year will far exceed anything you pay me (or most other accountants).

All non-client reviews are based on my hourly rate of $275 per hour. Regular clients have an advantage since I already know their tax situation and have their return on file. I need more review time with non-clients to acquaint myself with their tax situation.

I encourage you to begin a dialog with a tax professional early this year due to higher demand on their services. Your withholding is almost certainly wrong and to the government’s benefit. If you never consulted with a tax pro this is the one year you might want to consider it anyway.

I can see all your hands up. Yes, I will handle as many as humanly possible. However, I have a strong feeling my larger public presence will crimp the percentage of non-clients I can accept compared to demand.

The forum on this blog and Mr. Money Mustache are a great resource if you don’t have a tax professional on speed dial. I also expect many local accounting firms to add hours to handle the extra consulting this year.

Finally, you are welcome to contact me for consulting, a review and/or to prepare your return. I recommend you read the Working with the Wealthy Accountant page before hitting the Contact button.

Stalking the Accountant at the Finish Line | The Wealthy Accountant

Saturday 17th of March 2018

[…] Here is the blog post with the winning comment. […]


Thursday 1st of March 2018

I just text my accountant the link to this post to ask him if I should do anything differently, but I want to summarize what you're saying to make sure I understand:

The withholding tables are wrong, I'm going to probably owe the IRS some massively unexpected sum of money next year unless I calculate it myself now and make adjustments.

I have a W2 job but also several rental properties and an outside consulting business. When I text my accountant I asked if I should adjust my work withholding or just send in more in estimated taxes in my case. It's easier for me to just do the latter because making changes where I work can sometimes be complicated, so I'd rather not touch anything there unless it's like a hair-on-fire level tax emergency :)

Keith Taxguy

Thursday 1st of March 2018

It's not so much the withholding tables are wrong, Rachel; it's that it is hard to adjust now that we don't have exemptions. My very small sampling size showed problems. I'll update with a new post if I discover the extent of the withholding issue is worse or better than my initial pool of clients I reviewed.


Tuesday 27th of February 2018

Keith, as many of your readers are FI enthusiasts, could they not use the lower withholding to their advantage by contributing more to their 401K or deductible IRA's? Many of us, especially with 1040 income and a side hustle are utilizing every possible avenue to sock away as much pretax as possible, including Solo 401K for the side hustle/business income. If my taxable income is greatly reduced due to tax sheltering resulting in even less being withheld, how is this a negative?

Keith Taxguy

Tuesday 27th of February 2018

Blastmaster, utilizing retirement plans to reduce taxes still works. However, increasing 401(k) or similar contributions will not solve the underwithholding problem as the withholding tables adjust to the lower includable income after contributions to the retirement plan. The result is still underwithholding and a potential balance due with penalties.

Side hustles and business owners already calculate their taxes based on actual income when figuring their estimated tax payments so they are less affected here.

A deductible IRA is a good idea for those who can use it. Many readers and clients have a retirement plan at work and earn over the limit where a deduction is allowed.

The reason this is a negative is that underwithholding will generate a balance due for many and an interest penalty. It also requires a budget item to handle the extra tax expense in spring. I'd rather see consistent investing by clients (and readers). The smoother the ride the more likely my client will remain vigilant in their investing program.


Monday 26th of February 2018

Great article. Thank you for pointing out the withholding issues this far in advance!

Just as a sidenote. There is an ad on this article that keeps moving the entire text of the page up and down as it moves through its gif. I am assuming the gif is made of two different size pictures. This viewing issue is on a desktop.

Keith Taxguy

Monday 26th of February 2018

I'm not having the issue on my desktop. Anyone else? Is it in the text or a sidebar?


Monday 26th of February 2018


I don't understand what the problem would be for people who have simple situations. Perhaps you deal with complicated clients. The IRS has already released formulas how to calculate 2018 taxes. People with W-2 just need to prepare a simple tax return (I do in Excel that mimics 1040 though it can be done by hand) and find out their tax liability for the whole year and then by month or whatever pay period. Then see if that amount is close to the amount withheld on their current pay-stub. Of course if one has passive income tax withholding should be account for that as well.

Am I missing something?

You made it sound like a major hurricane coming like an insurance salesman trying to sell a whole life insurance LOL.

Keith Taxguy

Monday 26th of February 2018

Simple has nothing to do with it, Mimoza. Businesses and landlords have issues QBI and wage earners have an issue with the new withholding tables. "Simple" isn't what will hit you; income level will. A client with a W-2 and nothing else is a simple return, but the withholding could radically change his outcome next year. Household incomes under $50,000 and families are less affected.