Thanks to the new tax regime under the Tax Cuts and Jobs Act (TCJA), you may have had a bigger than expected tax refund this year. The IRS urges people like you to go online to assess how much tax you’re likely to pay and then tell your employer to adjust your monthly payments.

The situation

The IRS has called on people who got a different tax refund (higher or lower) than expected to go online and use the Withholding Calculator to assess just how much tax they are likely to have to pay in this tax year.

According to the IRS, “To make use of the tool more effectively, employees must possess a copy of the 2018 tax return that they’d filed earlier this year and also recent paystubs for every job held by both spouses if married & filing jointly. With these documents, employees can respond to the questions the calculator asks to help them better estimate their credits, deductions and other amounts for 2019 more accurately.”

The Withholding Calculator will then recommend the allowances you should file on your W-4 form that will reduce your taxes further. If you are likely to owe more tax, the calculator will tell you how much extra money you should ask your employer to deduct from your pay check to reduce the amount of additional tax you will have to pay when it comes to clearing up your affairs at the end of the year.

Who should do this?

The IRS suggests that it is good practice for everyone to check their tax status every year anyway but it recognizes that not everyone does. After the TCJA however the tax authority suggests that everyone should have a look, but especially those who fall into the following categories:

  • Has high income or a complex tax return.
  • Itemized deductions in the past.
  • Claims credits like the Child Tax Credit.
  • Has two or more jobs at the same time or only works part of the year.
  • Has a two-income family.
  • Has a major life change this year like having a child, has a dependent older than 17, or has a relative who has become a dependent. 
  • Expected to owe less tax or get a bigger 2018 tax refund

Under the new tax reform act these people are likely to see significant differences in what they owe the tax man this year so really should take steps to reassess what they may owe so there are no ugly (or too nice) surprises when they have their tax assessed next April.

There is another category – those who have very complex tax returns such as those who may be running a business themselves as well as being employees of another. In this case, the IRS state, “Rather than making use of the Withholding Calculator, employees with tax situations that are more complicated must utilize the worksheets & special instructions in Publication 505, Tax Withholding and Estimated Tax, available on IRS.gov. This includes those who expect to receive long-term capital gains or qualified dividends, or employees who owe tax on unearned income of minors, alternative minimum tax, or self-employment tax.”

What next?

If you are affected by a significant change this year then you need to move now to reduce the impact of a larger-than-expected payment next year, or to avoid paying too much tax in the interim. You need to fill out a new W-4 form and get it to your employer as soon as possible. In addition, the IRS state, “recipients of annuities and pensions can make a change by completing the Form W-4P & handing it to their payer. They shouldn’t send these forms to the IRS.”

If you owe more tax than the last time around it makes sense to increase your withholding now so you don’t run into trouble come to the end of the tax year. Not everyone has a few thousand bucks floating about to pay the tax man (if you have it is usually for something like a holiday or college fund, not in case you have to pay the IRS!).

Time to grit your teeth?!

Let’s face it, no one likes the bureaucracy around paying their taxes, let alone finding that money to pay them. Like cleaning house ahead of your in-laws visiting it makes sense to get that out of the way now to avoid the pain and distress later!

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