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 IRS has called on people who got a different tax refund (higher or lower) than expected to go online and to 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 use the tool most effectively, employees should have a copy of the 2018 tax return they filed earlier this year as well as recent paystubs for all jobs held by both spouses if married and filing jointly. With these documents, employees can more accurately respond to the questions the calculator asks to help them better estimate their deductions, credits and other amounts for 2019.”
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:
- Expected to owe less tax or get a bigger 2018 tax refund
- Has a major life change this year such as having a child, has a dependent older than 17, or has a relative who has become a dependent.
- Has a two-income family.
- Has two or more jobs at the same time or only works part of the year.
- Claims credits like the Child Tax Credit.
- Itemized deductions in the past.
- Has high income or a complex tax return.
Under the new tax reform act these people are likely to see significant differences in what they own 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, “Instead of using the Withholding Calculator, employees with more complicated tax situations should use the worksheets and 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 self-employment tax, alternative minimum tax or tax on unearned income of minors.”
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 pensions and annuities can make a change by filling out Form W-4P and giving it to their payer. They should not 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 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!