Check your withholding now to avoid a large tax bill in 2019
The Tax Cuts and Jobs Act (TCJA) could have an impact on the amount you withhold throughout the year, even if you received a large refund this year. In fact, the changes are so significant that the IRS has updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks, generally reducing the amount withheld.
The revised tables account for the increase in the standard deduction, suspension of personal exemptions and changes in tax rates and brackets.
But you may need to look further. The new tables may provide the correct amount of tax withholding for individuals with simple tax situations, but they might cause taxpayers with a more complex situation to not have enough withheld to pay their ultimate tax liabilities under the TCJA. So even if you received a large refund this year, you could end up owing a significant amount of tax when you file your 2018 return next year.
Perils of the new tables
The IRS cautions that people with more complex tax situations face the possibility of having their income taxes under-withheld. If, for example, you itemize deductions, have dependents age 17 or older, are in a two-income household, or have more than one job, you should review your tax situation and adjust your withholding if appropriate.
Instead of relying on the new tables alone, the IRS has updated its withholding calculator (available at irs.gov) to assist taxpayers in reviewing their situations. The calculator reflects changes in available itemized deductions, the increased child tax credit, the new dependent credit and repeal of dependent exemptions.
More to consider
The change in tax law isn’t the only reason to review your withholding amount. If you receive a large tax refund this year you might consider reviewing your withholding amount. Although it is nice to receive additional dollars, you just gave the government an interest- free loan. A more effective savings strategy would be to lower your withholding to an appropriate amount using the IRS tables or calculator and saving the additional dollars in an account that will earn interest.
It’s also a good idea to review your withholdings if:
- You get married or divorced,
- You add or lose a dependent,
- You purchase a home,
- You start or lose a job, or
- Your investment income changes significantly.
You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly payments are due.)
Our best advice is: “Don’t go it alone.” Contact Melissa Knisely, CPA, Ciuni & Panichi, Inc., Tax Department Manager, at 216-831-7171 or by email here to determine the best tax plan for your situation.
You may also be interested in:
Tax document retention guidelines for businesses
Tax Cuts and Jobs Act – Confused?
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