Since the president signed the Tax Cuts and Jobs Act into law on December 22 of last year, many clients have been asking if they should make and changes to withholding from their paycheck.
The Tax Cuts and Jobs Act made significant changes to tax law, including almost doubling the standard deduction, removing personal exemptions, increasing the child tax credit, limiting certain deductions, and changing the tax rates and brackets.
Well, it took a couple of months, but the Internal Revenue Service recently updated their Withholding Calculator on the IRS.gov site (just search for “Withholding Calculator”), as well as Form W-4 to help taxpayers check and change their 2018 tax withholding.
The IRS is suggesting that taxpayers use these tools to make sure they have the right amount of tax withheld from their paychecks. If changes to withholding should be made, the calculator gives employees the information they need to fill out a new W-4, which they then will submit to their employer.
The withholding changes do not affect 2017 tax returns, because the tax reform does not affect 2017’s return. However, having a completed 2017 tax return can help taxpayers work with the Withholding Calculator to determine their proper withholding for 2018 and avoid potential issues when they file next year.
Among the specific groups who the IRS feels should check their withholding are:
- Two-income families.
- People with two or more jobs at the same time or who only work for part of the year.
- People with children who claim credits such as the Child Tax Credit.
- People who itemized deductions in 2017.
- People with high incomes and more complex tax returns.
Tips for Using the Withholding Calculator:
- Gather your most recent pay stub from work. Check to make sure it reflects the amount of Federal income tax that you have had withheld so far in 2018.
- Have a completed copy of your 2017 (or possibly 2016) tax return handy. Information on that return can help you estimate income and other items for 2018. However, note that the new tax law made significant changes to itemized deductions.
- Keep in mind the Withholding Calculator results are only as accurate as the information entered. If your circumstances change during the year, come back to the calculator to make sure your withholding is still correct.
- 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. As always, watch out for tax scams, especially via email or phone calls and be especially alert to cybercriminals impersonating the IRS. The IRS does not send emails related to the calculator or the information entered.
- Use the results from the Withholding Calculator to determine if you should complete a new Form W-4 and, if so, what information to put on a new Form W-4. There is no need to complete the worksheets that accompany Form W-4 if the calculator is used.
- As a general rule, the fewer withholding allowances you enter on the Form W-4 the higher your tax withholding will be. Entering “0” or “1” on line 5 of the W-4 means more tax will be withheld. Entering a bigger number means less tax withholding, resulting in a smaller tax refund or potentially a tax bill or penalty.
- If you complete a new Form W-4, you should submit it to your employer as soon as possible. With withholding occurring throughout the year, it’s better to take this step early on.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.