By now, you may have been contacted by your employer to change your federal and state exemptions. Both because it’s a new year- and because of the tax law that was enacted last year.   Normally, you can follow the instructions that you are provided.  (But NEVER choose 9 or more exemptions- even if you think that makes sense, because that sets off alarms with every tax agency.  I’m not saying you are wrong- I am just saying, why bring on the aggravation.)

This year, the IRS is guessing how to advise taxpayers to choose exemptions.  Both because they have been starved for qualified employees (the GOP is angry that the IRS collects fees from those folks who fail to sign up for the mandated [until next year] health insurance and for the incorrect assumption that the IRS chose to penalize social welfare (yeah, if you believe that, it’s time for you buy all those bridges I don’t own in Arizona, because I need some real social welfare) organizations that were really camouflaged political action groups for the GOP.  (I’m not saying that the IRS didn’t investigate these charades- just that they did the same investigation for the Democratic malarkey artists who claimed these organizations for their own goals.)

Oh, and there may be political reasons why the IRS may be providing inaccurate information.  That way folks will think they are really getting bigger tax breaks than the law provides.  (Don’t get me wrong right here- they WILL generally have a lower tax bill- and in a few cases, as we will see, dramatically lower federal taxes.)

The problem is, if they choose the wrong bracket, they won’t find out about those errors until after the election in November.  As a matter of fact, they won’t realize the potential problems until they file taxes sometime in March or April of next year- and find they owe money.

Why am I saying that?  Because too many folks are forgetting that their state and property tax deductions are limited.  So, they need to adjust their withholdings accordingly.   Let’s consider five examples.

Our first example is a married couple.  John and Mary are married and have two kids.  Each parent grosses $ 60K.  Their state taxes withheld are $ 7000, their property taxes are $ 6000, and their mortgage interest is $ 5000.

Frank is a single fellow  who makes $ 150K in New York City.   His state and local tax withholdings are $ 15K and he rents his abode.

Carol is a single mom, who makes $ 95K, and has two wonderful kids.  Her mortgage interest is $ 7000, her property taxes are $ 6500 and her withheld state taxes are $ 8000.

And, finally, to see what happens when one’s kids are in college, we’ll add two more examples.

The first couple, Bob and Petunia are two older government workers.  Their two kids are both  in college.  Each parent makes $ 125K,  with state taxes of $ 9K, property taxes of $ 12K,  $16K in mortgage interest, and $ 25K in tuition payments.

The last couple are Larry and Donna.   All their expenses are the same as Bob and Petunia, except their gross income isn’t $ 250K, but only $ 200K.

And, what do we find?  The state tax burden has increased- sometimes dramatically.  Why?  Because the states have not adjusted their tax rules to meet the new Federal choices.  And, since states assumed that many of their residents would itemize and would certainly have personal exemptions that no longer obtains (given the eradication of individual exemptions at the federal level and the changed standard exemption), the state tax burdens are higher.

As you can see, Carol, the single mom, really saves a significant amount of money.  But, every single example has a lower federal tax bill.    But, now matter the scenario, the state tax burden increases.

Please note that I didn’t include those folks with pass-through incomes.  Or, significant capital gains.  Because those situations (especially if the taxpayer were a lawyer or doctor) have significant “gotchas”!

So, be careful.  Try out various scenarios to determine what your tax burden will be under the new tax rules.  And, choose accordingly.