The Treasury Department and Internal Revenue Service recently announced that they have launched an updated Withholding Calculator to help tax payers determine the proper amount of withholdings from their paychecks to reflect the new tax law.
Because of changes contained in the Tax Cuts and Jobs Act, a quick checkup may be in order to determine if changes to the current withholdings from your paycheck are needed. If too little taxes are being withheld, this could result in an unexpected tax bill and/or possible penalties from the IRS. Likewise, having too much withheld means a person is going home with less money each pay day, only to get a big refund from the IRS come tax time. That’s money that could be used to pay bills, buy groceries, etc. and is instead being needlessly withheld from each check.
The new tax law does not affect 2017 tax returns due this April, however, having a completed 2017 tax return can help taxpayers work with the Withholding Calculator to determine their proper withholding for 2018 and avoid issues when they file next year.
“Withholding issues can be complicated, and the calculator is designed to help employees make changes based on their personal financial situation,” Acting IRS Commissioner David Kautter said. “Taking a few minutes can help taxpayers ensure they don’t have too little – or too much – withheld from their paycheck.”
If changes to withholding should be made, the Withholding Calculator gives employees the information they need to fill out a new Form W-4, Employee’s Withholding Allowance Certificate. Employees will submit the completed W-4 to their employer.
According to the IRS, these are the groups who should verify their withholdings:
- Two-income families.
- People with two or more jobs at the same time or who only work for part of the year.
- People with children who claim credits such as the Child Tax Credit.
- People who itemized deductions in 2017.
- People with high incomes and more complex tax returns.
Tips for Using the Withholding Calculator
The IRS suggests the following tips prior for using the Withholding Calculator:
- Gather your most recent pay stub from work. Check to make sure it reflects the amount of Federal income tax that you have had withheld so far in 2018.
- Have a completed copy of your 2017 (or possibly 2016) tax return handy. Information on that return can help you estimate income and other items for 2018. However, note that the new tax law made significant changes to itemized deductions.
- Keep in mind the Withholding Calculator 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.
- The Withholding Calculator does not request personally-identifiable information such as name, Social Security number, address or bank account numbers. The IRS does not save or record the information entered on the calculator. As always, watch out for tax scams, especially via email or phone calls and be especially alert to cybercriminals impersonating the IRS. The IRS does not send emails related to the calculator or the information entered.
- Use the results from the Withholding Calculator to determine if you should complete a new Form W-4 and, if so, what information to put on a new Form W-4. There is no need to complete the worksheets that accompany Form W-4 if the calculator is used.
- 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. Entering a bigger number means less tax withholding, resulting in a smaller tax refund or potentially a tax bill or penalty.
- If you complete a new Form W-4, you should submit it to your employer as soon as possible. With withholding occurring throughout the year, it’s better to take this step early on.