Filing season for the 2018 tax year brought unwelcome surprises for many taxpayers. Following a major tax code overhaul at the end of 2017, it was reasonable for estimates of the year’s tax liability to be less accurate than normal. But while the IRS made allowance for some of this predictable deviation, the agency won’t maintain such a tolerant stance for long. To avoid unexpected tax bills or penalties for underpayment in subsequent years, workers should check current withholding rates and if necessary, file an updated Form W-4 with their employer.
Conveniently enough, the IRS is working to complete a brand new Form W-4 that reflects changes in how withholding is calculated. The new version of the form will join updated withholding rate tables already in place for 2019. But you don’t have to wait for final approval on the new form to act; instead, adjust your withholding now to minimize the risk of underpaying through the rest of the year.
If you owed tax for 2018, you should perform a Paycheck Checkup. Start by gathering last year’s tax return and your most recent pay stub. With these records in hand, visit the Tax Withholding Estimator tool on the IRS website. The estimator will guide you through a series of questions to determine the proper withholding rate based on your predicted income, filing status and tax deductions.
If the estimator shows that your current rate is withholding too much or too little tax from each paycheck, you may want to give your employer an updated W-4 to change the amount. Having too much tax withheld is fine if you like getting a large refund, but if the estimator tells you you’ll owe taxes at the end of the year, a new W-4 is definitely in order.
On the heels of tax reform, most people should go through the process of checking and adjusting their withholding rates at least once (better to check two or three times unless you like surprises). But even when the tax code hasn’t changed, the tax estimator can be a useful tool to keep your withholdings in line with your evolving tax burden.
As children grow up and no longer qualify their parents to claim the Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Tax Credit or various educational credits, tax liability can change dramatically. We celebrate our children’s growth and development, but sooner or later that increased maturity triggers a loss of Head of Household status for single or divorced taxpayers. This too can make a big difference in what you owe Uncle Sam at the end of the year.
Similarly, a raise or promotion – or a reduction in pay – can alter a filer’s overall tax picture. Getting married? Finally paying off those student loans? Losing a spouse to death or divorce? These are only a few of the many life events that affect tax liability. In every case, paying a visit to the withholding estimator can avert paying the IRS an additional chunk of money come next April.
Keep in mind that the Tax Withholding Estimator is no substitute for a qualified tax professional. Always consult your CPA with any questions regarding tax planning, tax liability and appropriate withholding rates. But for most taxpayers, this handy tool can help you determine whether you’re overpaying or underpaying, or like a taxation Goldilocks, you’ve found the withholding rates that are just right.
To learn more about how the Tax Cuts and Jobs Act affected your tax liability, reach out to the tax planning professionals at Halt, Buzas & Powell. We help employers and employees alike find individualized strategies to benefit your long-term tax situation.