If you were out-of-pocket paying additional tax with your 2017 tax return, now is the best time to review your tax obligations for 2018 to prevent another payout next April. The Tax Cuts and Jobs Act legislation, passed in December, 2017 made some major changes to the way taxes are calculated, as well as changes to the numbers themselves.
The changes are extensive enough that many taxpayers can no longer assume that the outcome of their 2017 return will have anything in common with 2018, and the Internal Revenue Service is advising taxpayers to be proactive, using its tools to perform what they call a “paycheck checkup” to learn now whether they’re likely to qualify for a refund or required to pay an outstanding tax balance with next year’s return.
The Withholding Calculator
The IRS provides this calculator as a way for you to estimate your year-end tax situation now. If the calculator shows you’ll have a balance next April, you can adjust payroll tax withholding now, so that you don’t have to fork over the bucks when you file.
On the other side of the coin, if you’re due a big refund, you may want to reduce your withholding. This gives you more money each payday. Remember, a tax refund isn’t a bonus you get from the IRS. It’s your money, held without earning interest, for the year. You might prefer to have the lump sum at the end of the year, but the choice is yours, and the withholding calculator helps you make your decision.
Tips for Using the Calculator
The calculator is an informal tool. The IRS doesn’t store or save any of the information you enter, nor does it require personal identification. You can run through what-if scenarios without worry that it will somehow affect your actual tax return.
You’ll provide information such as your estimated 2018 income, dependent children and other typical tax data. Have some recent pay stubs on hand. Keep your 2017 return nearby. While the tax laws have changed, it may be a good source of data. The accuracy of the calculator depends on the accuracy of the information you provide.
Most taxpayers can use the calculator successfully. Some people with more complicated tax pictures may need to use Publication 505. This document has instructions for calculating tax for those who owe taxes such as the self-employment tax. If you have long-term capital gains, or qualified dividends, Publication 505 is also your go-to tool.
Changing your withholding amount does have some potential drawbacks. By law, taxes must be paid as you earn income. If you have income from self-employment, interest, capital gains and other sources, you may need to make estimated tax payments. If you’re not making these, or if you’re not withholding enough tax from payroll sources, you could be earmarked for penalties.
Similarly, if you need to make estimated payments and these are late, you could be charged a penalty as well, just as you would with a late tax payment in April. It may not matter if your tax return shows a refund. You’re still required to make estimated tax payments on time.
Making Withholding Adjustments
If you decide to make a change to your withholding amounts based on your paycheck checkup, complete a Form W-4 and submit it to your employer as soon as possible. If you’ve had changes to your life that affect your withholding status, you’re also required to submit a new Form W-4 within 10 days of the change occurring.
The smaller the number on line 5 of your Form W-4, the greater your tax withholding. As you add withholding allowances, the number on line 5 increases. This means less tax is withheld and the chances you run into a balance owing situation at tax time increases.
With the new tax laws, any changes you make now to your tax withholding may have a different effect for the full year in 2019. Plan to do another paycheck checkup when the new year rolls around.