Under the new tax reform law, tax rates were reduced by 1 percent to 3 percent, and many taxpayers already started seeing more money in their paychecks. While you may be happy to see this increase, right now is the perfect time to revisit your W-4 form to make sure the correct amounts are withheld by your employer, especially if you have kids or usually itemize your deductions.
The IRS recently released an updated withholding calculator and a new version of Form W-4 to help taxpayers check their 2018 withholding following the passage of the new tax law.
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What is withholding? If you are an employee, your employer most likely withholds income tax from your paycheck. Your paycheck includes the regular pay you see each pay period. It can also include reimbursements and other expense allowances paid under a non-accountable plan. Taxes are also withheld from certain other income, including pensions, bonuses and commissions. By adjusting your withholding allowances, you change the amount you see on your paycheck and the amount you’ll owe or receive as a tax refund.
It is always recommended that you revisit your W-4 form to adjust your withholding allowances, especially if you’ve experienced life changes or started a new job. But it is now more important than ever due to the 2018 tax law changes, such as the elimination or reduction of some itemized deductions, increased child tax credit to $2,000 and elimination of dependent and personal exemptions.
Here’s what you need to know about the impacts of the new law on your W-4 form.
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Taxpayers who itemize may now have to claim standard deduction. The standard deduction for single filers increased from $6,350 to $12,000. For filers who are married filing jointly, it rose from $12,700 to $24,000. If you itemize your deductions, you can usually claim more withholding allowances on your W-4, allowing your employer to withhold less. But with some of the changes under the new tax reform law, you may see fewer itemized deductions or may now have to take the standard deduction since it has almost doubled. If this is the case, you may need to lower your withholding allowances and have more taken out of your paychecks.
Personal and dependent exemptions are now eliminated. Personal and dependent exemptions for yourself and qualifying family members reduce the amount of income on which you will be taxed. This is an amount you get to deduct from your income for every taxpayer and most dependents claimed on your return. The elimination of these in tax year 2018 is one of the biggest changes in the tax law and on the W-4 form. Some of the main allowances given on your W-4 to reduce your withholding are for the dependent and personal exemption, so if you can no longer claim those, you may see a change.
If you’re a parent, you may now be eligible for the child tax credit if you were not before. There are two important changes to the child tax credit that impact taxpayers and should be reflected on the W-4. First, the child tax credit doubled from $1,000 to $2,000 under the new law, so you may be allowed more withholding allowances due to this change and have less taken out of your paycheck. Second, the income threshold increased from $110,000 to $400,000, so you may now be eligible for the child tax credit when you weren’t before.
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Self-employed filers and side-gig workers can adjust withholding to offset self-employed income. About 80 percent of TurboTax tax returns are filed with both W-2 income and 1099 income. If you have a side gig and W-2 income, remember that income can bump you into a higher tax bracket, so it’s a good idea to adjust your withholding with your W-2 employer to offset your self-employed income.
If you get a bonus, it’s subject to a different withholding. Employers used to deduct 25 percent off the top of a bonus, but that’s now been lowered to 22 percent. Workers who receive bonuses will see more in their paycheck initially but should think about adjusting their personal withholding allowances so they have enough withheld from their paychecks.
If you have property or own a home, there will be caps on how much you can deduct. If you own a home in a high property tax area, you’ll know that in years past, you’ve been able to fully deduct all state and local property, income and sales taxes on the house. With the new 2018 law, these deductions will now be capped at $10,000, meaning you won’t be able to deduct as much from your taxes.
While it may feel good to have that extra cash in your paycheck, you’ll want to revisit your Form W-4 to make sure you have enough withheld from your paycheck, so there are no surprises when you file taxes in 2019. Whether you prefer to have more withheld or to get more money in your paycheck, it’s best to revisit your W-4 every year.
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Noticed an Increase in Your Paycheck? Time to Revisit Your W-4 originally appeared on usnews.com
