The Idaho income tax withholding quandary

The problem: Income tax withholding payments in the state of Idaho are well below anticipated levels this year. While sales tax collections and corporate income tax payments are up in 2018, personal income tax withholding is below predicted levels. The reduced revenue to the state is causing some uncertainty in the state budgeting process.

With the economy running strong and unemployment at near record lows, what is causing the lower than expected income tax withholding payments to the state? In 2017, the federal government made significant changes to our tax structure, including lowering income tax rates, increasing the standard deduction, eliminating personal and dependent exemptions, and capping or eliminating itemized deductions. In 2018, the Idaho Legislature enacted similar tax reforms to mirror federal changes. Historically, Idaho tax laws parallel, or conform to, federal tax laws in an effort to simplify the tax system. There are now subtle differences between the federal and state tax laws which did not exist for the last few decades. As a result, IRS Form W-4 withholding allowance calculations are different for federal withholding and state withholding.

What to expect: Since most of us have been running along this year using the same withholding allowance we’ve used in the past, many people have not had enough state income tax withheld during the year. It is likely that some people who typically receive a state income tax refund will not have a refund due or may even owe additional tax. Keep in mind that the 2018 Idaho tax law changes did reduce the state income tax rate. You will pay less tax overall for the year if your income is unchanged, but your withholding during the year may have been low enough that an additional amount is due come April 15. The under-withholding is particularly noticeable for those who have more than one job or for married couples with both people working.

What you should do: First off is to update your income tax withholding. Because of the newly enacted differences between federal and state tax laws, it is necessary to use a different withholding allowance for the two different tax agencies. Calculate a withholding allowance for your federal taxes using the IRS Form W-4 instructions. Separately calculate a state withholding allowance using the Idaho specific instructions. The state instructions are available online at tax.idaho.gov. Provide both a federal and state withholding allowance to your employer. There is consideration being given to a separate Idaho withholding allowance form.

In summary: Recent tax law changes have created a situation where many Idahoans are not having enough Idaho income tax withheld from their paychecks. Our Idaho income tax rate was reduced from 7.4 percent to 6.925 percent last year, but because of significantly reduced withholding it is possible that taxpayers will not receive their typical refund or might owe additional tax. To alleviate the problem, we should all update our withholding allowance and recognize that the allowance will probably be different between federal and state taxes.

Sen. Jim Woodward represents District 1, Bonner and Boundary counties, in the Idaho Senate. He can be reached at [email protected].