You’ve probably already seen changes to your paycheck due to the new personal income tax rates and brackets created by the Tax Cuts and Jobs Act. But the new tax-withheld amounts are actually only estimates that the IRS and many American corporations made based on their calculations of how most people will be affected by the new tax law. Since this will be the first year for this new tax law and the estimated tax withheld in your paycheck isn’t based on any previous results, it’s extremely important that you double-check the allowances on your Form W4. You need to make sure the correct allowances are claimed on your W4 so that the proper amount of tax is being withheld from your paycheck each pay period.
To help taxpayers check their 2018 tax withholdings, the IRS released a new version of Form W4, which combined with an updated W4 Calculator, should help you ensure your current tax withholdings are what you need them to be for your individual situation. And if you find that you need to make changes to the amount of tax withholdings, the W4 Calculator will help give you the necessary information to fill out a new Form W4, which you should submit to your employer as soon as possible because withholding occurs throughout the year.
The Tax Cuts and Jobs Act increases the standard deduction and the child tax credit, eliminates personal exemptions, limits or discontinues certain itemized deductions, cuts corporate tax rates, and changes personal income tax rates and brackets. The new withholding changes don’t affect returns for tax year 2017 due this April. But a completed 2017 tax return can help the W4 Calculator determine your correct withholding for 2018 and avoid potential problems when you file taxes next year.
Generally, if too much is being withheld, that’s an extra amount of your money the IRS is holding, which means you can’t use it until you get your tax refund the following year. If too little is being withheld, then you’ll have to pay the IRS an unexpected tax bill instead of getting a refund. And if the amount withheld is less than 90% of your current year’s tax burden or 100% of the tax shown on the return for the prior year, whichever is smaller, you may end up owing penalties and interest too.
Who Should Do a Withholding Checkup?
With the average tax refund being more than $2,800, some taxpayers may want to have less tax withheld by their employer so they can receive more in their paychecks. Valuable and free tax tools like the W4 Calculator, Tax Organizer, and Tax Calculator can be used to help with what to claim on your W4 and keep track of all your necessary forms and tax paperwork in response to the new tax law or if you start a new job or experience new personal circumstances so you aren’t caught off guard at tax time.
Taxpayers with simple tax situations (for example, individuals and married couples with just one job and no dependents and who have not claimed itemized deductions, adjustments to income, or tax credits) might not need to make any changes to their withholdings. While those with more complicated financial situations might need to revise their W4.
People who should definitely check their withholdings include those with:
- Two or more jobs at the same time
- Income for only part of the year
- Itemized deductions in 2017
- A high income and more complex tax return
- Children and who claimed the Child Tax Credit
- A family earning two or more incomes
To help clarify about what to claim on your W4, the fewer withholding allowances you select, the higher your tax withholding will be, which could lead to a larger refund and less money in your paycheck each pay period. Therefore, “0” or “1” allowance results in more tax being withheld. Entering a larger number of allowances means less tax is withheld from your paycheck, giving you a smaller tax refund or potentially even a tax bill or penalty.
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