Even if a person claimed an appropriate number of withholding allowances on Form W-4, there’s no guarantee that the total withholdings will match one’s tax liability for the year. Many people learned this lesson the hard way during the 2018 tax liability for the year. Many people learned this lesson the hard way during the 2018 tax filing season, receiving smaller refunds than expected or even owing the IRS more taxes. This article explains the problem with withholding tables and discusses how to avoid surprises next year.
If you receive paychecks from one or more employers, it’s a good idea to do an annual checkup to make sure the right amount of income tax is being withheld. Even if you claimed an appropriate number of withholding allowances on Form W-4, there’s no guarantee that your total withholding will match your tax liability for the year. Many people learned this lesson the hard way during the 2018 tax filing season, receiving smaller refunds than expected or even owing the IRS more taxes.
The problem with withholding tables
An employer determines the amount of tax to withhold from your paycheck by consulting the IRS’s withholding tables. These tables estimate withholdings based on the amount and frequency of your wages, the number of withholding allowances you claim, and your marital status.
But while these estimates are reasonably on target for many people, for some they result in over-or under holding. If you over withhold, you’re essentially making an interest-free loan to the government. If you under withhold, you’ll have to make a payment with your tax return, plus penalties and interest in some cases.
After the Tax Cuts and Jobs Act (TCJA) reduced individual income tax rates, the IRS adjusted the withholding tables to reflect taxpayers’ lower tax bills. But for many people, the tables overcompensated for the new tax law, reducing their refunds or even requiring them to make payments with their 2018 returns.
To avoid unpleasant surprises on your 2019 return, review your withholdings now and adjust them if necessary for the rest of the year. a review is particularly important if you:
- Had a large refund or tax bill in 2018,
- Have multiple jobs or are part of a dual-income family,
- Work only part of the year,
- Claim the child tax credit,
- Have dependents age 17 or older, or
- Typically itemize deductions.
You should also double-check your withholdings if your income is very high or your tax return is complex.
Begin the review by filling out the IRS’s withholding calculator at the IRS’s website. You’ll be asked for information about your filing status; income; dependents; various deductions, credits and adjustments; and current withholding arrangements. The calculator estimates your tax liability for the year and tells you whether you need to increase or decrease your withholding (and by how much) to avoid an underpayment or over payment.
For additional peace of mind, or if your tax situation is particularly complex, ask your tax advisor to review the results. Your situation may be considered “complex,” for example, if you’re subject to alternative minimum tax, pay self-employment taxes, owe taxes on a child’s investment income (the “kiddie” tax), have long-term capital gains or qualified dividends, or collect taxable Social Security benefits.
To adjust your withholding amount, submit a new Form W-4 to your employer. You can reduce your withholding by increasing the number of withholding allowances or increase them by specifying an additional dollar amount you want withheld from each paycheck. Be aware that the IRS is planning to release a new, more complex Form W-4 designed to produce more accurate withholding amounts.
Have regular checkups
It’s good practice to review your withholdings at the beginning of each tax year. That way, any adjustments you make can be spread over the entire year with minimal impact on the size of your paychecks. And consider revisiting you withholding calculations during the year if any major life changes, such as marriage, divorce, birth or adoption of a child, or death of a spouse, have an impact on your tax liability. Contact your tax advisor for further guidance.
Jaime D. Rorie, CPA
Jaime specializes in financial statement audits and other attestation engagements including compilations and reviews of for-profit, non-profit, and government entities. She also conducts audits of employee benefit plans and provides tax return services for individuals, corporations, and non-profits.