As soon as Congress began debating tax law changes in late 2017, there's been much controversy and confusion about just how much individual taxpayers would benefit.
For months, it's basically been a guessing game.
Now, however, we each can get a more precise idea of our tax liability under the Tax Cuts and Jobs Act (TCJA) that took effect on Jan. 1. The Internal Revenue Service has updated its online withholding calculator.
The new calculator version, along with a revised Form W-4, should help taxpayers determine their proper 2018 payroll withholding amounts.
In with the new, out with the old W-4: For the last two months, the IRS and workers have been relying on 2017 withholding data. But with the IRS' updates, it's time for folks to use the calculator to make any appropriate changes to their W-4 forms and submit them to their employers.
"Following the major changes in the tax law, the IRS encourages employees to check their paychecks to help ensure they're having the right amount of tax withheld for their personal situation," said Acting IRS Commissioner David Kautter in announcing the withholding calculator's updates.
Among the TCJA changes that affect withholding are increased standard deduction amounts, elimination of personal exemptions, changes to the child tax credit, limits to or discontinuation of certain deductions and new tax rates and income brackets.
"Withholding issues can be complicated, and the calculator is designed to help employees make changes based on their personal financial situation," Kautter said. "Taking a few minutes can help taxpayers ensure they don't have too little — or too much — withheld from their paycheck."
Matching withholding to tax bill: Adjusting withholding is, as long-time readers of the ol' blog know, the best way to ensure that you don' over- or under-pay Uncle Sam. Your goal should be to get your withholding mount s close to your final annual tax bill as possible.
If you don't withhold enough, you'll end up having to make up the difference when your file your annual tax return. Owing a little isn't necessarily bad. It means you've have use of your money throughout the tax year. And if the tax due is relatively small, it's not such a burden to pay when you submit your 1040.
But if your calculations are off and you've have way too little withheld, you have to come up with the balance due. If it's a big bill, that could be big problem.
If you withhold too much, you'll get a refund. Many people think that's a good idea and in fact intentionally have too much tax withheld from their paychecks. They view it as a forced savings account.
That's fine if you make the choice to do that. The calculator can help you determine just how much of a refund you'd like to receive next year.
No change for simpler tax situations: The key caveat of taxes applies here. Taxes are intensely personal.
People with simple tax situations might not need to make any changes, says the IRS. This includes single people and married couples where only one spouse gets a salary.
Also falling into the simpler tax situations are filers who have no dependents, who don't claim itemized deductions or adjustments to income (aka above-the-line deductions, some of which were eliminated by the new tax law) or don't take tax credits.
Among the taxpayers who should check their withholding using the updated calculator are those who:
- are part of a two-income family,
- hold two or more jobs at the same time,
- only work for part of the year,
- have children that allow them to claim credits such as the Child Tax Credit,
- itemized deductions in 2017, and
- have high incomes and more complex tax returns.
Taxpayers with more complex situations also might need to use IRS Publication 505, Tax Withholding and Estimated Tax, instead of the online withholding calculator.
That document, however, is not yet revised. The updated version is expected to be available on IRS.gov in early spring,
Taxpayers who should at least thumb through Pub. 505 include those who owe self-employment tax, the alternative minimum tax or tax on unearned income from dependents, as well as filers who have capital gains and dividends.
Withholding calculator tips: If you use the online calculator, the IRS has some tips so that you can the most out of it.
- Have your most recent pay stub on hand. Check to make sure it reflects the amount of federal income tax you've had withheld so far this year.
- Have handy a completed copy of your 2017 tax return, or 2016 filing if you haven't filed yet this year. Information on a prior return can help you estimate income and other items for 2018. Note, though, that the new tax law significantly changed popular itemized deductions.
- Don't worry about your personal identifying info such as such as your Social Security number, address or bank account numbers. Heck, it doesn't even ask for your name. None of that is necessary to get an idea of how much you want withheld. Remember this if you ever get an email about missing withholding calculator information. That will be a crook trying to scam you and steal your tax identity.
- Keep in mind the withholding calculator's results are only as accurate as the information entered. If your circumstances change during the year, come back to the calculator to make sure your withholding is still correct.
If you have more questions about withholding and the online calculator check out the IRS' Frequently Asked Questions on this topic.
Final withholding thoughts: As a general rule, the fewer withholding allowances you enter on the Form W-4, the higher your tax withholding will be.
Entering 0 or 1 on line 5 of the W-4 means more tax will be withheld, producing less take-home pay.
Conversely, entering a bigger number means less tax will be withheld, resulting in a smaller tax refund and potentially a tax bill or penalty.
Whatever your tax situation in light of the new tax laws, you should consider adjusting your payroll withholding now to ensure that your withholding aligns properly for the remainder of the 2018 tax year.
You also will want to possibly redo your W-4 when start a new job or have other changes throughout the year in your personal life, such as getting married or having a baby.
You can make changes as often as you want or need — and as long as your payroll administrator will let you into her office!
March 2018 tax moves: Adjusting your withholding is just one of the tax tasks you can take care of in March.
In addition to refining your withholding to more closely align with the tax law changes, you can find a variety of other March Tax Moves to make over these next 31 days over there in the ol' blog's right column.
March's pieces of tax advice are, as usual, listed under the countdown clock that's keeping track of how long until we reach this year's April 17 filing deadline.
Not every piece of tax advice will apply to every taxpayers (or blog reader), but check them out to ensure that you get the lion's share of tax savings.
You also might find these items of interest:
- The pros and cons of tax refunds
- S.C. woman uses federal tax refund to pay year's rent
- New IRS withholding tables reflect lower tax rates,
but Treasury says most people still will get refunds next year