Don't Mess With Taxes

Long-time ol' blog readers know I regularly nag remind them to make sure their payroll withholding is correct.

The tax goal is to have the amount of income taxes taken out each pay period to be as close as possible to what you owe when you file your return. Adjusting that amount can get you to that target.

That's accomplished by completing a new Form W-4 with your new withholding details, as discussed in my post earlier this year on how to get your tax withholding just right. OK, maybe I am a bit of a tax nag.

Withholding changes complications: You give that revised W-4 to your employer whenever your earnings situation or life changes necessitate.

But although the form is just one page, it has three others.

The instructions fill up page 2. Then there's a page with a couple of worksheets, one for folks with multiple jobs, the other for those with dependents. The final W-4 page is filled with tables that apply to taxpayers who have multiple jobs or who are married and file a joint tax return.

All this information is used to account for changes under 2017's tax reform, known officially as the Tax Cuts and Jobs Act. Due to those tax law tweaks, Form W-4 now offers you four ways to change your withholding.

You can reduce the amount of tax withheld, increase the amount of tax withheld, increase the amount of income subject to withholding, or decrease the amount of income subject to withholding.

Those four possibilities are all related and could be reduced to one net figure. So, just how do you get to that single W-4 number?

As also noted in my previous withholding post, the Internal Revenue Service is happy to help you get to this number. It provides on IRS.gov a Tax Withholding Estimator, available in English and Spanish.

The opening page of the Tax Withholding Estimator shows the six steps — About You, Income & Withholding, Adjustments, Deductions, Tax Credits, and Results — it takes to figure the amount you should enter on Form W-4.

The online withholding tool does the math for you. And by doing the calculations online, you don't have to reveal as much about your family or non-work finances to your boss. Plus, the online tool does not save your information.

Withholding estimator prep and limits: The IRS withholding estimator can help, but as with other tax calculations, the online tool's results are only as accurate as the information entered.

To enter the most precise data, you'll need —

• Your most recent pay statements. If you're married, you'll need your spouse's pay data, too.
• Information for other sources of income. This includes money from side gigs, investments, retirement benefits (private pensions and Social Security), and any other income that's not subject to withholding.
• Your most recent income tax return.

The withholding estimator can be used any time there's a need to adjust withholding. That includes not just salary changes, but also after a major life change, such as marriage, divorce, home purchase, or the birth or adoption of a child.

The online tool, however, isn't for everyone. The web page says don't use the withholding estimator if —

• You have a pension but not a job. Instead, estimate your tax withholding with Form W-4P.
• You have nonresident alien status. Use Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens.
• Your tax situation is complex. This includes alternative minimum tax, long-term capital gains, or qualified dividends. Publication 505, Tax Withholding and Estimated Tax, has more on these situations.

For more information on the IRS' online withholding tool, check out the agency's special Tax Withholding Estimator FAQs.

And regardless of whether the estimator recommends you have more or less withheld, you need to run those numbers now.

The sooner you make the withholding change, the more time there is for the changes to be spread over the year's remaining paychecks. This makes the adjustment, in either more or less each pay period, less of a per-paycheck jolt.

You also might find these items of interest:

• Estimated taxes: Why, when, and how to pay them
• Tax Turkey to Avoid #1: Incorrect withholding and how to adjust it
• Have a side hustle? Pay estimated tax and/or adjust your main job's withholding

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