Abstract: Every
year’s tax return provides valuable lessons on the optimal amount that
taxpayers should have withheld from their paychecks. This article explains how
the Tax Cuts and Jobs Act affects this issue and what circumstances may prompt
one to make changes.
Heed
the lessons of your tax return and check your withholding
Every year’s
tax return provides valuable lessons on the optimal amount that taxpayers
should have withheld from their paychecks. Heeding these lessons is especially
important if you end up owing a substantial amount of money.
Of
course, even if you get a nice tax refund, that shouldn’t necessarily be your
goal. It essentially means you’re giving the government an interest-free loan.
Here’s a primer on why and how to review your withholding and change it, if
necessary.
The TCJA’s impact
Following
the passage of the Tax Cuts and Jobs Act (TCJA), the IRS updated the
withholding tables that indicate how much employers should hold back from their
employees’ paychecks. In general, the amount withheld was reduced. This was
done to reflect changes under the TCJA — including the increase in the standard
deduction, suspension of personal exemptions and changes in tax rates.
The new
tables provided a reasonable amount of tax withholding for some individuals,
but they caused other taxpayers to not have enough money withheld to pay their
ultimate tax liabilities. Although many people have since adjusted to the
TCJA’s impact, the IRS urges taxpayers to review their tax situations annually
and adjust their withholding as appropriate.
The
agency provides a withholding calculator to assist you. The calculator reflects
tax law changes in areas such as available itemized deductions, the increased
child credit, the dependent credit and the repeal of dependent exemptions. You
can access the IRS calculator at https://bit.ly/2aLxK0A.
Circumstances that trigger change
There
are a variety of specific circumstances that should trigger you to check your
withholding. For example, if you adjusted
your withholding in 2019 — especially in the middle or later part of the year —
give it another look. Also, as mentioned, if you got hit by a bigger tax bill
than you expected, or received a sizable refund, you may want to make an adjustment.
Certain life changes typically
warrant adjusting withholding as well. These include getting married or
divorced, having a child or adopting one, buying a home, or incurring notable
changes in income.
You can
modify your withholding at any time during the year, or even multiple times
within a year. To do so, simply submit a new Form W-4 to your employer. Changes
typically go into effect several weeks after a new Form W-4 is submitted. (For
estimated tax payments, you can make adjustments each time quarterly estimated payments
are due. The next payment is due on Monday, June 15.)
We can help
Contact us to discuss your situation and what you can do to remedy
any shortfalls to minimize taxes due, as well as any penalties and interest. We
can help you sort out whether to adjust your withholding.