If you’re like millions of Americans, you discovered the hard way that the Tax Cuts and Jobs Act of 2017 promised more than it delivered after you filed your 2018 tax return. You didn’t get the refund you thought you would. Or, even worse, you owed taxes because you didn’t have enough withheld from your paycheck.
Boy, did the IRS ever hear complaints from taxpayers about these issues. But don’t count on Congress and President Trump to change the laws anytime soon. Which means it’s up to you to make sure you’re having enough taken out of your paycheck to avoid an unwanted tax surprise next year.
Fortunately, the IRS is about to make this task a little easier.
The IRS’s new Tax Withholding Estimator lets you see if your current withholding amounts could lead you to “refund” or “nothing owed” territory or whether you may want to boost them to cover anticipated income from other sources such as side gigs, investments or taxable distributions from 401(k) plans and IRAs.
Unlike your tax refund, you’ll get the answers right away, which will give you a game plan for deciding if adjustments are needed.
Before you begin…
Like most tax tools, the Tax Withholding Estimator asks you a series of questions about your filing status, dependents, pretax contributions (such as those made to retirement accounts), income sources and tax credits.
And if you’ve ever used any kind of tax preparation software, you know that you'll need to have a pile of tax-related documents at your side before you start. The IRS tool doesn’t save the information you enter, so you have to go through it in one session. Save yourself some frustration by having the following at your side:
- A few recent pay stubs;
- Your 2018 income tax return;
- Estimates of side gig and other non-job-related income for the year;
- Tax statements from banks and investment accounts listing capital gains and ordinary income;
- Estimates of total taxable retirement plan distributions or withdrawals for the year;
- Medical and dental expenses; and
- A list of any other tax credits you receive or anticipate receiving.
And if you believe that your itemized deductions will be more than the standard $24,000 deduction for couples ($12,000 for individuals), you’ll also want to gather estimates of potentially deductible:
- State income and real tax payments for the year;
- Mortgage interest payments;
- Charitable donations;
- Medical and dental expenses; and
- Other expenses you typically deduct.
If you’re not sure which items are tax-deductible, consult the IRS itemized deductions topic page.
To adjust or not to adjust
When you’re done answering the questions, you’ll receive an estimate of whether you’re more likely to owe or receive a refund for the 2019 tax year, based on your current withholding rate. You’ll also be able to see IRS recommendations for changing your withholding rates to achieve one of two outcomes: Owing nothing (or as little as possible); or getting a refund.
If you want to withhold more—or less—you can then fill out on online W-4 Form that includes instructions on what to enter to achieve your desired outcome. You can then download and print the form and give it to your employer to implement your changes.
It’s important to keep in mind that the tool is designed for people with basic tax situations. If your tax situation is more complex, you may either want to take a look at the IRS Guide to Tax Withholding and Estimated Taxes or consult with your accountant or tax preparer.
This article was authored by Dan Flanagan, a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Canby Financial Advisors are separate and unrelated to Commonwealth. He can be reached at 508.598.1082 or at [email protected]
Canby Financial Advisors does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.