By Theresa Fry, Senior Vice President and Manager, IRA’s and Retirement PlanningPrint This Post
This time last year, many taxpayers were shocked to discover that despite getting income tax refunds in the past – and changes in the tax laws that promised reduced income tax rates, a doubled standard deduction, and an increased child tax credit – they owed money to the IRS! Were you one of those unhappy taxpayers? Did the same thing happen again this year? If so, you may want to do a paycheck check-up!
The 2017 Tax Cuts and Jobs Act did, in fact, lower the overall tax bill for many people in 2018. According to data released by the IRS in early March, Americans paid almost $64 billion less in federal income taxes during the first year of the new tax law changes. However, the IRS also reduced the amount your employer was required to withhold from your paycheck to help prevent taxpayers from over-withholding under the new tax laws. Suffice it to say, most people didn’t notice that their paychecks were a little larger or that they might not be withholding enough to cover the taxes they owed. Almost 890,000 more income tax returns showed taxes owed in 2018, even though total tax bills were $1 billion smaller than the prior year.
The IRS tried to encourage taxpayers to double check their withholding throughout the year. They regularly promoted their tax withholding calculator on their website (www.irs.gov). This year, they released a new version of Form W-4 to file with your employer to elect your withholding rate. The new 2020 W-4 does away with lingo like “allowances” since they are no longer relevant, and lets you take into consideration a spouse’s job or multiple jobs you have, your dependents, and other sources of income and deductions – changes that hopefully make withholding elections a little easier for taxpayers to understand.
From a financial perspective, many people prefer to receive an income tax refund and often plan out how to spend it in advance. But a better-case scenario that lets you keep as much of your paycheck as you can without owing the IRS any money when you file is a zero-sum game. Owing nothing, and getting no refund is a good result to strive for because it lets you save and invest your money while you earn it instead of giving it to the government to hold for you until you file your tax return.
To that end, the IRS’s Tax Withholding Estimator tool is a great way to get there. You’ll need to have your most recently filed income tax return and your most recent pay statement (your spouse’s too, if you are married) to get started. After you enter information about your income, withholding, credits and deductions, you’ll get dashboard that will let you see whether you can expect a refund or to owe taxes. It also provides a slider that lets you adjust the amount and guidance on how to complete the new W-4 form to achieve the result you are looking for. Of course, it is just a tool. Doing a paycheck check-up may not get you exactly to that goal of zero, but if you are getting large refunds or you owe more than you thought you would, it is worth a visit or two throughout the year to see where you are so you can avoid surprises when you file your tax return next year.
The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards & Co. does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.