Paycheck checkup

The Tax Cuts and Jobs Act took affect this year causing changes that affect taxpayers across the country. Although a major goal of the tax reform was to put more money in the pockets of taxpayers, if you’re not careful regarding your tax withholdings, the changes may cost you more than the average taxpayer may save.

The IRS is encouraging taxpayers to perform a “paycheck checkup” to check their withholdings. It is generally advised to check withholdings yearly and also when life changes such as marriage, divorce or birth or death of a dependent occur. This year it’s especially important to double check your withholdings due to the recent tax changes. 

Under the Tax Cuts and Jobs Act the standard deduction was nearly doubled and many itemized deductions were either limited or eliminated. Deductions for state and local taxes and the home mortgage interest deductions have been limited. Deductions for employee business expenses, tax preparation fees and investment expenses, including investment management fees, safe deposit box fees and investment expenses from pass-through entities have been eliminated. 

Because of these major changes, taxpayers who previously claimed itemized deductions to deduct large amounts may not be able to do that this year. These taxpayers along with others should be sure to check withholdings to be prepared for any potential changes in their tax situation caused by the new law. For these reasons the IRS is urging taxpayers to use the new IRS Withholding Calculator to perform a “paycheck checkup” as soon as possible to assure that the amount of withholdings are correct.

 Why Use The Tax Calculator

The calculator’s main function is to assist you in identifying that the right amount of withholdings is being withheld. Your withholdings under the new law may be different than before. If there is not enough withheld you can end up with a higher tax bill. If too much is being withheld your tax refund would be larger but you’d get smaller paychecks. For example, if your average refund is $3,000 you may prefer to have more money in your pocket each pay period and receive a smaller tax refund. 

A Few Calculator Tips:

Have your prior year return ready. The system will ask if you claim standard or itemized deductions. If you itemized your deductions in the prior year, you’ll want to use your tax return to gather information to help you estimate your 2018 itemized deductions. It’ll also help you determine an estimated amount for your 2018 income, deductions, adjustments and credits. The calculator will ask about the number of dependents you claim for credits such as the Earned Income Credit and the Child Tax Credit, as well as various other items that may affect your 2018 tax situation.  

Gather your most recent paystubs so that you can enter how much income you’ve made and how much you’ve had withheld so far this year.

The IRS wants to you to keep in mind:

The calculator’s results will only be as accurate as the information you provide. If your circumstances change during the year, come back to this calculator to make sure your withholdings are still correct. They also want taxpayers to remember, 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, taxpayers should watch out for tax scams, especially via email or phone and be alert to cybercriminals impersonating the IRS. The IRS does not send emails related to the Withholding Calculator or the information entered.

 If it appears that you need to make any changes you can use the results from the calculator to help you complete an updated Form W-4 Employee’s Withholding Allowance Certificate and submit it your employer. Since withholdings are taken from every paycheck, it’s best to do this as soon as you can. As a rule the fewer withholding allowances that are claimed, the more taxes withheld. And the more you claim, less is withheld in taxes, so if you are claiming too many allowances this will reduce your refund, possibly cause you to owe taxes and even a possible penalty. When a life change comes about that may reduce the number of withholding allowances claimed, an employee has 10 days to submit an updated their form W-4.

Special Circumstances

Though the calculator will work for most taxpayers, it may not for people with more complex tax situations. People who have special tax situations such as long-term gains, dividends, dependent unearned income, owe self-employment or alternative minimum tax should use the instructions in Publication 505-Tax Withholding and Estimated Tax. It may also be a good decision for these individuals to contact a tax advisor for additional assistance. 

For more information or to use the calculator for a “paycheck checkup” visit 

Brittany Salbaza, an enrolled agent (EA), is director of tax education at Pro Tax Solutions and a tax columnist.

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