Last week, in response to confusion surrounding the 2018 tax law that was passed in December, the IRS released an updated online Withholding Calculator. The tool is designed to help taxpayers make sure they are not wildly underpaying or overpaying what they will owe.
The new law is highly complex and made changes that included increasing the standard deduction, removing personal exemptions, increasing the child tax credit, limiting or discontinuing certain deductions, and changing the tax rates and brackets.
The online calculator should go a long way to help employed taxpayers plan ahead, particularly those in middle-income and upper middle-income brackets.
This is important because you don’t want to be withholding too much –in effect giving the government a free loan of money you could be investing in your home, the market, educational savings funds, or just your day-to-day needs. On the other hand, you don’t want to be withholding to little and risk facing an unexpected tax bill or penalty at tax time in 2019
According to the IRS some of the groups who should check their withholding are:
- Two-income families
- People with two or more jobs or seasonal work
- People with children who claim the Child Tax Credit (or other credits)
- People who itemized deductions in 2017
- People with higher incomes and more complex tax returns
According to Acting IRS Commissioner David Kautter, about 90 percent of taxpayers would have “some adjustment one way or the other” to the amount they are withholding. That’s most of us.
The changes do not affect 2017 tax returns due this April. Your completed 2017 tax return can, however, help you input data to the Withholding Calculator to determine what you should be withholding for 2018 to avoid issues when you file next year. And if you do need to change the amount you are withholding (remember- 90% of us might), there is also a new version of the W-4 form to download and submit to your employer.
More information is available from the IRS here: Withholding Calculator Frequently Asked Questions.
And if you have questions about how these important changes may affect you, please call us for a free consult or reach out to your CPA.