Tax Prep & Planning

Now’s The Time To Do A W-4 Withholding Checkup

Tax Day is over, but taxes are not. Taxes should be a year-round consideration, whether you like it or not. A top consideration should be your W-4 withholdings. When you start a new job or experience a life change, one of the many forms you’re required to fill out for your employer is Form W-4. This form is used by your employer to determine the amount of tax to withhold from each paycheck.

There is no better time than NOW to do a tax withholding checkup to make sure the right amount of tax is withheld so you can avoid an unexpected tax bill next year – or experience the opposite scenario where you are withholding too much from each paycheck. Why? Tax reform has changed the rules for withholding and you don’t want to get too far into the year with withholding the wrong amount.

People who have too much tax withheld will get less money in their regular paycheck. If those taxpayers change their withholding and enter more allowances on Form W-4, they’ll get more money in their paychecks throughout the year. On the other hand, employees who have too little withheld may not be paying enough taxes throughout the year, and they may face an unexpected tax bill or penalty when they file next year.

As a wage-earner, one of the best ways to decrease your tax liability or increase your refund year-to-year is through by selecting the proper number of W-4 allowances. Why is this, you ask? Your employer uses the number of allowances, along with your marital status and pay frequency to determine how much to withhold from your paycheck. The state and federal income tax withholdings subtracted from each paycheck have a significant effect on the amount of tax liability you owe or total tax refund you may receive next spring.

Tax Reform and Withholding Changes

Under previous tax law, you would indicate the number of allowances claimed on Form W-4. Each allowance reduced the amount of taxes your employer withheld. You could add an allowance for each personal exemption claimed on your return, generally including:

  • For yourself
  • For your spouse
  • For each eligible dependent

Additional allowances were also available for certain other items, including estimated itemized deductions and various tax credits.

The number of exemptions you could claim each year affected more than just your W-4 allowances. Under prior law, your exemptions factored into determining your taxable income on your return, as well as whether you were required to file a tax return. The personal exemption amount was also subject to a phase-out threshold depending on your filing status.

The New Law Eliminates Exemptions

The new Tax Cuts and Jobs Act (TCJA) suspends the deduction for personal exemptions on your return and modifies the rules for when you must file a return for tax year 2018. Proper completion of Form W-4 has changed as well. Generally, you would add allowances for yourself, for married filing jointly or head of household filing status, for each child who qualifies for the child tax credit. As before, you would also add allowances for estimated itemized deductions and certain other credits. The new W-4 worksheets factor in the TCJA’s tax rates as well as other tax law changes. For instance, the new itemized deduction worksheet accounts for the $10,000 limitation on deducting state and local taxes.

Action Items

It’s important to adjust your Form W-4 with your employer so they can withhold the correct amount from your paychecks. To complete or modify Form W-4, here are a few things you can do.

  • Use the IRS Withholding Calculator to help determine if you should complete a new Form W-4. This tool offers taxpayers the necessary information to put on a new Form W-4.
  • Find out how to access your W-4 within your workplace. The form should either be available online or available via human resources (HR).
  • As a general rule, the fewer withholdingallowances you enter, the higher your tax withholding. Entering “0” or “1” on line 5 of the W-4 instructs an employee to withhold more tax. Entering a larger number means less tax withholding, resulting in a smaller tax refund or, in some cases, a tax penalty.
  • Take action now! The sooner you wait to submit and file an amended W-4, the less tax will be taken out of their paycheck. This could result in payments due when you file your taxes in 2019.

Life Events That Spur a W-4 Withholding Check

While everyone is impacted by tax reform, it’s especially important to revisit your W-4. The IRS especially recommends checking your withholding if you itemize deductions, claim the child tax credit, have a two-income household, or have other complicated tax issues. Here are a few life events where you would also benefit from a W-4 withholding check-up:

1 – You received large tax refunds in past years

When you withhold too much tax from your paycheck, you pay in too much tax during the year to the IRS.

2 – You have owed taxes in years past

Remember: if you withhold too little tax, you might owe money when you think you’re getting a refund.

3 – You have a second job

Working a side hustle? If you work more than one job, check the total withholding amount and make adjustments as needed. It will ensure the amount you withheld covers the total amount of the taxes you owe, based on a combined income your jobs.

4 – You make estimated tax payments

If you are self-employed or are a partner and S Corporation shareholder, you likely make quarterly estimated tax payments throughout the year if you meet a precise threshold for quarterly earnings. Some of these types of workers also work for an employer, so you can often forgo making quarterly payments by taking more tax out of your employer-paid earnings. In this case, you can adjust your W-4 withholdings from your employer to withhold more taxes each year.

5 – You started a new job

If you started a new job this calendar year, you should revisit your typical W-4 withholdings to make sure you are withholding the proper amount. Your total withholding should cover the income tax owed from your new and old jobs combined.

6 – You buy or sell a home

The addition of, or loss of, substantial income as a result of a real estate sale could impact your withholdings.

7 – You added or lost a dependent

Even though the dependent exemption is suspended for now, there are dependent-related tax benefits that change when your family configuration changes.

8 – You got married or divorced

If there is a change to your legal relationship status – you get married or divorced – you should modify your W-4.

How to Get Personalized Help

Confused as to how tax reform will impact you? Bring in your 2017 tax return to one of our Block Advisors locations, and at no cost you will receive an analysis of how tax reform will impact you, a Second Look® Review, and suggestions on how to make appropriate W-4 adjustments to maximize your tax outcome. 

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