With the revisions to the tax code announced in the Tax Cuts and Jobs Act last year, chances are you’re aware of changes to credits, exemptions and tax brackets, which could translate to having too…
With the revisions to the tax code announced in the Tax Cuts and Jobs Act last year, chances are you’re aware of changes to credits, exemptions and tax brackets, which could translate to having too small an amount withheld from your paycheck. But if you neglected to review the new income-tax withholding tables and calculate how much income tax should be taken from your paycheck, you’re not alone. According to a Government Accountability Office report released in July, an estimated 21 percent of taxpayers are under-withholding taxes and will owe taxes next year.
So, if you haven’t given any thought to withholding tables and the amount of money you opted to withhold from your paycheck when you last updated your W-4, it’s a wise idea to review your current withholding amount and keep these pro pointers in mind.
Remember: It’s not too late to make changes. The year is rapidly coming to a close, but you can still make some adjustments for the remaining pay periods. While you may still owe money when you file your taxes next year, you’ll likely owe less than you would have without reviewing the amount you’re currently withholding and making adjustments.
Know where to check your paycheck withholding — and how to make adjustments. It may be a wise idea to consult with your employer’s payroll and human resources departments to fill out a new W-4 form and adjust the number of “allowances” you opt for on the form. Alternatively, the Internal Revenue Service’s website has a withholding calculator that will walk you through some questions on several webpages and will offer recommendation as to how much you should withhold. One benefit of using the IRS’s withholding calculator is that you won’t have to complete the Form W-4 worksheets. You’ll also want to remember that the fewer withholding allowances you enter, the more tax that’s withheld. If you have a higher number of withholding allowances, you may receive a smaller tax refund or owe the IRS. And keep in mind, it’s not disadvantageous to receive a small tax refund; if you receive a large refund, you’re essentially providing the government with an interest-free loan on your money.
Still, if you have a tax preparer, this would be a good time to utilize his or her services. A professional can help you navigate complex questions about tax credits, such as the child tax credit and other credits you may be eligible for, including a mortgage credit and education credits.
Why the tables changed and why it’s important to check them. “The new withholding tables use the updated tax rates to withhold income tax from everyone’s paycheck,” explains Mike Zeiter, a certified public accountant and personal financial specialist who owns Foundations Financial Planning, LLC in Carthage, Missouri.
“The new rates are lower, which means essentially everyone received an increase in the amount they received each paycheck because the withholding is less,” he says. “This sounds like good news for everyone, however, not everyone’s tax liability will decrease this year under the new law.”
If you typically make many deductions, you’ll likely need to adjust the amount you’re withholding. If you itemize your deductions, you’ll definitely want to take another look at those tax withholding tables, says William Lee, a portfolio manager and financial advisor with Ironwood Investment Counsel, an investment advisory firm in Scottsdale, Arizona. He says that there are two main questions you need to ask yourself when it comes to thinking about deductions and your tax liability: Have you historically itemized your deductions? Have you historically received a refund? “If the answer to question No. 1 is no and the answer to question No. 2 is yes, it becomes very straightforward. Your refund will grow, assuming the same withholding rate,” Lee says. Why? You’ll have a larger standard deduction along with the overall tax rates declining, he explains.
On the other hand, if you said yes to both questions, Lee advises evaluating how much your itemized deductions were. “With the doubling of the standard deductions to $12,000 for an individual and $24,000 for a married couple, you can measure last year’s deductions, and if they are lower than the standard deductions, then you will no longer need to itemize, and this group too will save money on their taxes relative to 2017,” Lee says.
However, if you historically had much larger itemized deductions or if you have historically owed, then you need to reassess what deductions you will be able to take and readjust your withholding, Lee says. In short: If your tax situation is complicated, you must carefully consider if it makes sense to increase the amount of money withheld from your paycheck. It’s a smart idea to consult with a professional tax preparer to ensure you adjust your withholding appropriately.
If you contact your tax professional, and it turns out that you have not withheld enough taxes from your paycheck, he or she could prepare an estimate of what you’ll owe for taxes next year, so you can stay ahead of the curve, says Jeffrey Schneider, an enrolled agent, certified tax resolution specialist and owner of SFS Tax & Accounting Services in Stuart, Florida.
“It’s bad enough when a taxpayer owes a lot at tax return time. However, when this amount is a surprise, it’s worse,” he says.