Tax Prep & Planning

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

Tax Day is over, but taxes should be considered year-round.

And if you were unhappy with your tax outcome this tax season, on the top of your to-do list should be doing a W-4 withholding checkup.

Why? You want to make sure enough tax is withheld so you can avoid an unexpected tax bill next tax season.

Last year, changes to IRS withholding tables resulted in smaller refunds, or larger balances due for many taxpayers this tax season. If you’re looking for a different outcome next tax season, you don’t want to get too far into the year without taking another look at your withholding! It can make a big difference with your tax return.

More about Form W-4

When you start a new job, one of the many forms you’re required to fill out for your employer is Form W-4. Form instructions direct you to enter a number of allowances which, in turn, you base on your filing status, family configuration, whether you itemize deductions, and other factors.

Your employer uses the number of allowances you selected, along with your marital status and pay frequency to determine how much to withhold from your paycheck. The more allowances you selected, the less that is withheld from your pay and, conversely, the fewer allowances you selected, the more that is withheld from your pay during the year. Thus, 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 when you file your return after the close of the year.

Tax Reform and W-4 Withholding Changes

Early in 2018, the IRS revised withholding tables and accompanying instructions to accommodate the Tax Cuts and Jobs Act’s (TCJA) changes, including changes in tax rates, the elimination of personal exemptions, the increased child tax credit and new credit for other dependents, changes to itemized deductions, and more. Taxpayers were encouraged to revisit their W-4 withholding but many did not. The result was that although many taxpayers had lower overall tax liability because of tax reform and received more in their paychecks during the year, their refunds or balances due were different from what they expected.

Actions for YOU

It’s important to revisit your Form W-4 this year if you’re looking for a different outcome next tax season. 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 from your payroll department.
  • As explained earlier, decrease the number of allowances if you need or would like more withheld (or increase the number if possible if you need or would like more withheld).
  • If needed, you can also request your employer to withhold an additional amount from each paycheck.

Although you can adjust withholding any time during the year, the sooner you do, the changes to your paycheck will be less drastic and the more likely your outcome next tax season will be what you expect.

Life Events That Spur a W-4 Withholding Check

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, although you get a bigger refund, you’re paying in more than is needed during the year.

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 the combined income from your jobs.

4 – You make estimated tax payments

If you are self-employed or are a partner or S Corporation shareholder, you likely make quarterly estimated tax payments throughout the year if you meet a certain threshold for quarterly earnings. If you also work for an employer 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 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 have other types of income

If you have investment income (dividends, interest, capital gain), retirement income, or income from other sources you may need to change your withholding or estimated taxes.

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 marital status you should modify your W-4.

How to Get Personalized Help

Tax planning should be a year-round process. Bring in your 2018 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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