Every year, our tax returns give us a look into how much we should have withheld from our paychecks and how well we planned (or attempted to). While big tax refunds are nice, it shouldn’t necessarily be the goal since it really means you are giving the government an interest-free loan. Here’s how and why you should review your withholding and when you should consider adjusting it.
TCJA Impacted Many
After the Tax Cuts and Jobs Act (TCJA) was passed, the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ checks for each payroll period. (In general, the amount withheld was reduced due to the increase in the standard deduction, suspension of personal exemptions and changes in tax rates.
The new tables provided a reasonable amount of tax withholding for some individuals, but they caused many others to under-pay their ultimate tax liabilities. In fact, so many under-withheld that the IRS waived penalties for most people. Although many people have since adjusted to the TCJA’s impact, it is still a good idea to review your tax situation annually and adjust withholding as appropriate.
The IRS provides a withholding calculator to assist you that reflects tax law changes in areas such as available itemized deductions, the increased child credit, the dependent credit and the repeal of dependent exemptions.
Changes That Require Updates
Quite a few circumstances should trigger you to check your withholding. First, if you got hit by a bigger tax bill than you expected, or received a sizable refund, you may need to make an adjustment.
Certain life changes typically warrant withholding adjustments as well. These include getting married or divorced, having or adopting a child, buying a home, or incurring notable changes in income.
You can modify your withholding at any time during the year as often as needed. To do so, simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly estimated payments are due. The next payment is due on Wednesday, July 15, the extended deadline for first and second quarter estimated payments.)
We Can Help
Contact us to discuss your situation and what you can do to ensure you are paying what is needed toward your tax bill so you avoid making a large payment next year, or even paying penalties and interest. We can help you sort out whether to adjust your withholding.