In 2018 both the Federal and Idaho Income Tax Codes were amended to make major changes to the standard deduction and certain exemptions. While the changes impacted the entire year, the Idaho withholding tables were not implemented until mid-year. This resulted in a twofold problem. First, personal exemptions were eliminated; instead the amounts were built into the standard deduction. Second, the dependent exemption was replaced by a tax credit of $205. It is estimated that 70%-80% of taxpayers did not adjust their withholding and saw their payroll checks increase at a much greater amount than would have been expected, at the expense of state tax revenues.
This is resulting in the legislature struggling with a unique budgeting situation as the state personal income tax revenues for the past six months are falling short. These revenues mostly flow into the state in the form of employee withholding. There are many possible combinations of filing statuses and exemptions that can create an under-withholding situation. In the past, many taxpayers may have utilized the married, filing jointly status and claimed the personal exemption and still qualified for a refund. With the new tax reform they may be under-withholding and owe taxes at the time of filing.
It is believed that we are seeing a mismatch of revenue timing; however, we will not know for sure until after the April 15th tax filing date. If we could budget like many businesses, using the accrual basis, we would likely not have a problem. However, we can only spend the cash receipts, which are not matching our expectations. We will have a better feel for the cash flow if the January and February tax refunds are less than expected. In any event, many taxpayers accustomed to refunds may be surprised. If you have not already calculated your 2018 federal and state income taxes, you should do so soon and plan accordingly.
For more information regarding updating your W4, please visit the Idaho Tax Commission – W4.