Check withholding soon, avoid another one next year
Taxpayers who owed additional tax when they filed their 2017 federal tax return earlier this year can avoid another unexpected tax bill next year by doing a “paycheck checkup” as soon as possible, according to the Internal Revenue Service.
The Tax Cuts and Jobs Act, the tax reform legislation passed in December, made major changes to the tax law, including increasing the standard deduction, removing personal exemptions, increasing the Child Tax Credit, limiting or discontinuing certain deductions and changing tax rates and brackets.
These far-reaching changes could have a big impact on the tax refund or balance due on the tax return people file next year. The IRS encourages every employee to do a “paycheck checkup” soon to ensure they have the correct amount of tax taken out of their pay.
Checking and adjusting withholding now can prevent an unexpected tax bill and penalties next year at tax time. The IRS Withholding Calculator and Publication 505, Tax Withholding and Estimated Tax, can help.
The IRS encourages taxpayers to be proactive:
Do a ‘paycheck checkup’ soon
- The Withholding Calculator can help taxpayers apply the new law to their specific financial situation and make an informed decision whether to change their withholding this year.
- Adjust their withholding as soon as possible for an even, consistent amount of withholding throughout the rest of the year.
- Taxpayers with more complex situations may need to use Publication 505. The publication is more effective for employees who owe self-employment tax, the alternative minimum tax or tax on unearned income from dependents. It can also help those who receive non-wage income such as dividends, capital gains, rents and royalties. Publication 505 includes worksheets and examples to guide taxpayers through their particular situations.
- To avoid paying the estimated tax penalty, taxpayers should ensure they have enough tax withheld from their paychecks and appropriate estimated tax payments. Ordinarily, taxpayers can avoid this penalty by paying at least 90 percent of their tax during the year.
- If taxpayers expect to owe at least $1,000 in tax after subtracting withholding and refundable credits, they should make estimated tax payments.
Using the Withholding Calculator or Publication 505
- Taxpayers should have their completed 2017 tax return handy to help estimate the amount of income, deductions, adjustments and credits to enter. They’ll also need their most recent pay stubs to help compute their withholding to date this year. Results from these tools depend on the accuracy of information a taxpayer provides.
- Employees can use the results from the Withholding Calculator or Publication 505 to help determine if they should complete a new Form W-4, Employee’s Withholding Allowance Certificate, and, if so, what information to include on the form.
- The calculator may also be helpful to recipients of pension and annuity income. These recipients can change their withholding by filling out Form W-4P and giving it to their payer.
- If a taxpayer’s personal circumstances change during the year, they should re-check their withholding.
- If an employee determines they should adjust their withholding, they should complete a new Form W-4 and submit it to their employer as soon as possible.
- Some employers have an electronic method to update a Form W-4.
- Taxpayers who change their 2018 withholding should recheck their withholding at the start of 2019. A mid-year withholding change in 2018 may have a different full-year impact in 2019, so if taxpayers don’t submit a new Form W-4 for 2019, their withholding might be higher or lower than intended.
- If an employee has a change in personal circumstances that reduces the number of withholding allowances they can claim, they must submit a new Form W-4 within 10 days of the change.
- The fewer withholding allowances an employee enters on the Form W-4, the higher their tax withholding will be. Entering “0” or “1” on line 5 of the Form W-4 means more tax will be withheld; entering a bigger number means less tax will be withheld.
- The Withholding Calculator does not request personally identifiable information such as name, Social Security number, address or bank account numbers. The IRS does not save or record the information entered on the calculator. Taxpayers should be aware of tax scams, especially via email or phone and cybercriminals impersonating the IRS. The IRS does not send emails related to the calculator or the information entered in it.
- The calculator and Publication 505 are not tax-planning tools. Taxpayers needing advice regarding the new tax law and personal situations should consult a trusted tax professional.
Taxpayers can get more information on these topics at www.irs.gov/withholding. For information on steps taxpayers can take now to get a jump on next year’s taxes, including how the new tax law may affect them, visit IRS.gov/getready.
SOURCE: IRS – https://www.irs.gov/newsroom/tax-bill-this-year-check-withholding-soon-avoid-another-one-next-year