Doing a little tax calculating now will save you from surprises later
Two-paycheck families and homeowners with mortgages who typically itemize deductions are being warned that they might want to take a second look at how much money is being withheld from their paychecks now.
If they don’t, they could face an unwelcome surprise when they’re filing their tax returns next year. They might get a much smaller refund than they expect — and some might even owe far more money than they’re planning. The average federal income tax refund tops $2,800.
We started seeing bigger paychecks with more takehome pay in February in light of the tax changes that were signed into law in Washington in December. But tax professionals have noted that many taxpayers will want to adjust the amount of money that’s being withheld by their employers by updating their W-4 forms.
“For 2018, it’s better to be safe than sorry,” said Leon LaBrecque, CEO of LJPR Financial Advisers in Troy.
“A lot of people saw big increases in their take-home. That’s based on wages only. If you have other income, are in a two-earner household or have a business, you can be way off,” LaBrecque said.
The Internal Revenue Service suggests that taxpayers may need to do a “Paycheck Checkup.” The IRS on Wednesday rolled out its updated Withholding Calculator at www.irs.gov/individuals/ irs-withholding-calculator.
By using the online calculator, employees can figure out if they need to have more money withheld now to avoid an unexpected tax bill in 2019.
The IRS released new withholding tables in January for employers to use in 2018. The new tables reflect the increase in the standard deduction, repeal of personal exemptions and changes in tax rates and brackets.
But our tax system is far from one-size-fits-all. Tax experts warn that such tables cover simple tax situations and don’t take into account a wide variety of financial situations.
Simple situations, according to the IRS, include singles and married couples with only one job, who have no dependents, and who have not claimed itemized deductions, adjustments to income or tax credits.
The IRS said taxpayers who should check their withholding are:
❚ Families with two incomes.
❚ People who hold down two or more jobs during a year at the same time or only work for part of the year.
❚ People who claim credits such as the Child Tax Credit.
❚ People who itemized deductions in 2017.
❚ People with high incomes and more complex tax returns.
Most people, naturally, don’t want to hear about spending even more time looking at their taxes or financial situations in March or April, as we near the April 17 tax deadline.
The good news, of course, is that much of our paperwork is at the ready now.
To use the online calculator, the IRS suggests that taxpayers:
❚ Get a copy of your most recent pay stub from work.
❚ Have a completed copy of your 2017 tax return handy. Information on that return could help you estimate your income for 2018. But you need to realize that the new tax law made significant changes to itemized deductions. So your 2018 return might not look like your 2017 return. Talk with your tax preparer or run some numbers by using your tax software.
❚ Remember, making a change in withholding now does not impact 2017 tax returns due April 17. However, having a completed 2017 tax return can help taxpayers use the calculator to determine their proper withholding for 2018 and avoid issues when they file next year.
❚ Some families could want to change their W-4 in the future, too, if their circumstances change. Too often, people get hired at a job and never change their W-4 form even though they might marry, have children or take out a mortgage.
❚ The withholding calculator at www.irs.gov will not request your name or Social Security number. So watch out for any online calculators that ask for ID information, such as your address or bank account numbers.