Even if you've been under-withholding all year, check now. You don't want to be hit with penalties and interest.
It’s never made sense for just about any taxpaying person to get a big tax refund after April 15, which amounts to giving Uncle Sam a tax-free loan for up to 16 months, then waiting to get your own money back when you could’ve held on to it to invest or spend all year long.
That’s the main reason I always encourage working folks to check their tax withholding at least once a year, and consider getting that money put into their current paychecks. But this year, there’s an even better reason to make sure your withholding is on track: instead of a tidy check from the U.S. Treasury, the tax law changes made in 2017 could hit you with a big tax bill.
Don’t end up owing tax
The big tax bill signed just before Christmas – the Tax Cuts and Jobs Act of 2017 – made a lot of notable changes for everyday taxpayers, such as limiting your state and local tax deductions, eliminating charitable deductions, and taking away your ability to write-off the cost of preparing your return (a bizarre and unique American custom that takes an average of 13 total hours and a cost of $200, an expensive chore most other developed countries entirely eliminated years ago). But because of the last-minute nature of this hastily cobbled-together legislation, the withholding guidance issued to workers and employees when the new calendar year started just a few weeks later might not be accurate, according to a July report from the Government Accountability Office.
According to the report – requested by Democratic Senators, Ron Wyden of Oregon and Richard Neal of Massachusetts, 21 percent of all taxpayers haven’t had enough money withheld from their paychecks to cover their expected tax bills for the year. That’s a total of nearly 30 million workers, an increase of about 5 million taxpayers from the amount that would have owed under the previous tax rules.
Another big difference is that with the elimination of some deductions, the standard deduction amounts for 2018 increase to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly, up from $6,350, $9,350 and $12,700 in 2017. When figuring your withholding, you’ll want to take the standard deduction if it’s more than what you’ve deducted in the past or estimate that you will have to deduct.
Besides getting hit with a bill for the tax due, taxpayers who’ve under-withheld can be hit with penalties and interest at the federal, state, and local levels. But in most years, about three-quarters of all taxpayers end up getting some kind of refund. If you’ve left your withholding on auto-pilot from previous years, you could end up owing tax instead of happily cashing a refund check.
How to check your withholding
The best way to check your withholding rate is to use the very helpful official IRS withholding calculator. You’ll need your latest pay stub, and it helps to refer to your last tax return for specific items, such as whether you itemized, your total deductions, and whether you took the Child and Dependent Care Credit in the past. Then plug the numbers in and the results will tell you how to adjust your withholding. You can print out a new W-4 form and worksheet to fill out and give to your employer, or adjust your withholding at your workplace’s online payroll application or portal.
If you’ve been under-withholding all year, you can adjust your paycheck so that you’re entirely caught up by January, but most of us have only a few paychecks left in the year and can’t necessarily afford to cut them by any substantial amount for November and December. In that case, you’ll want to set aside additional savings between now and Tax Day or check out how you can arrange low-interest tax payments with the IRS. In some cases, the IRS calculator can over-estimate how much tax you’ll owe, resulting in a small refund, which should be the goal for most of us.
Once you’re done, check with your state and local treasurer’s offices (or your human resources office) about how to adjust your withholding for those governments.
If you’re one of the many lucky folks who check their withholding and see that you’re on track to get a refund, consider adjusting your withholding now so you can free up cash for the holidays or paying down debt. And don’t forget to update your withholding calculations after Tax Day, when the IRS updates the withholding calculator for 2019.
Brian J. O’Connor is the author of the award-winning budgeting book, “The $1,000 Challenge:
How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese.
Meet the Author
Article last modified on November 23, 2018 Published by Debt.com, LLC . Mobile users may also access the AMP Version: Check Withholding Now To Avoid A Big Tax Bill In April - AMP.