Next Step Now That Tax Season is Over: Check your Withholdings
Now that tax filing season is over, are you still just a wee bit upset that you didn’t receive a tax refund or owed more than you expected? You’re not alone. After the Tax Cuts and Jobs Act became law in late 2017, tax rates for most individuals were reduced effective with the 2018 tax return filing (currently through 2025). However, it doesn’t appear that way at first glance to many recent taxpayers.
In many cases, the reason why has to do with the fact that the IRS withholding tables were changed in 2018. And despite the IRS and tax experts recommending that taxpayers perform a “paycheck checkup” to estimate and potentially modify their withholdings in early 2018, many people failed to do so. The good news is that it’s fairly simple to calculate your withholdings using the IRS withholding calculator. It enables you to input figures for more than one earner, investment income and more to determine how much to withhold from your paycheck. You can then update your Form W-4 (Employee’s Withholding Allowance Certificate) using this information so that you aren’t having too little or too much withheld.
Another simple way is to take the amount that you owed this year and divide it by the number of paychecks remaining for the year, then add this to Line 6 of your W-4 form.
You may also use the Personal Allowances Worksheet on the W-4 form to calculate your withholdings, but this worksheet hasn’t been updated since the tax reform, and can be confusing according to some reports.
For retirees, withholding was lowered for pension and annuity payments, but you can adjust the amount withheld from your payments by using Form W-4 P or the IRS withholding calculator.
If you have nonwage income such as investment dividends or capital gains, you may want to use withholding rather than making quarterly estimated payments to avoid penalties.
Remember, the more allowances you claim on your W-4, the less money your employer will withhold for federal taxes. Conversely, the fewer allowances you claim, the more money will be withheld. To ensure you have enough money withheld for taxes in 2019, you may need to lower your number of allowances, in some cases, to zero. Although many people enjoy getting tax refunds during tax time, receiving a refund means that you gave the federal government a tax-free loan of your own money throughout the year.
