Many taxpayers who filed their 2018 tax returns are still seeing red. Even if their tax burden was lower than previous years, they discovered that they owed money to the IRS – sometimes painfully large amounts.
HOW DID THIS HAPPEN?
The IRS changed the withholding tables back in February 2018 due to tax reform. Employers were then prompted to withhold less money from employees’ paychecks in anticipation of lower income taxes under the new law. While millions of workers enjoyed fatter paychecks last year, the shock of owing the IRS this past April is still raw for many. It’s clear that the IRS’ withholding tables did not account for the numerous changes entwined within the new tax law. Current year withholding is still inadequate for the same folks unless changes are made.
YOU MAY BE AFFECTED IF YOU ARE IN ONE OF THESE GROUPS
It’s important for folks who fall into these categories to do a paycheck checkup:
• You and your spouse both work.
• You or your spouse held two or more jobs during the year.
• Your circumstances changed or you expect they will change in 2019.
• You claim the Child Tax Credit or will claim other available credits.
• Your tax return is complex.
• You weren’t happy with your refund or you paid too much with your most recent tax return.
WHAT YOU CAN YOU DO
Now is the time to review your withholding if you have not done so already. There are several reasons why you want do a checkup. If your refunds are typically sizable, why give Uncle Sam an interest-free loan when you can make your money work for you all year? On the other hand, if you have too little withheld, you may face an unexpected tax bill with possible penalties.
THE NEW FORM W-4
To get it right, most employees typically complete the IRS’ form W-4 and its related worksheets or simply guess how many exemptions they can claim. With tax reform, the W-4 form’s calculations are now far from accurate. Recognizing the need for revisions, the IRS plans to release a new W-4 that incorporates changes in the law. While the new form will be accurate, it will be a pain to complete and much like doing your taxes all over again. The final version will be released for use in 2020.
ALTERNATIVE WAYS TO CHECK YOUR WITHHOLDING
There are still ways you can check your withholding without the new W-4. Perform your own paycheck checkup with the free withholding calculator at www.irs.gov. The calculator will ask you to estimate values of your 2019 income, the number of children you will claim for the Child Tax Credit and other items that will affect your 2019 taxes.
To use the calculator, you will need a copy of your most recent tax return, along with your recent paystub and your spouse’s, if applicable. Keep in mind that the calculator’s results are only as accurate as the information you provide. If your situation changes during the year, revisit the calculator to make sure your withholding is still on track. While the withholding calculator works for most taxpayers, folks with more complex tax situations should consider reviewing their circumstances with a tax professional.
INFORM YOUR EMPLOYER
Use your results from the IRS’ calculator to determine if you need to update your W-4 and, if so, what information to include on the form. Submit the completed W-4 to your employer as soon as possible.
THE BOTTOM LINE
By doing a proactive checkup now, you have time to spread the changes out over several paydays. When in doubt, call a tax professional. ￼
Chris Thornburgh is a CPA and partner at Brown Armstrong Accountancy Corp. Contact her at email@example.com or 661-324-4971. The views expressed are her own.