What to do with that refund? What refund?Submitted by Financial Planning Solutions, LLC on March 7th, 2019
The Tax Cuts and Job Act of 2017 was one of the biggest changes to the tax law in over 20 years. One of the changes it made in early 2018 was reducing the payroll withholding amounts for employees. That meant a worker would immediately receive bigger tax-home paychecks.
How many of you noticed a bigger paycheck?
In talking with folks throughout 2018, I don’t recall anyone remarking about their bigger paycheck.
Fast forward to the current tax filing season: Most tax filers are paying less in federal income taxes compared to 2017. However, some filers—for the first time—are having to pay the IRS because they did not have enough withheld from their paychecks in 2018. This does not necessarily mean their taxes went up. It may mean that they did not have enough withheld.
To figure this out, first you need to determine exactly how much you actually OWED in federal taxes. For that, you need to go to your Form 1040, line 63, “This is your total tax.” Then you need to look at what you actually PAID in federal tax. That’s on line 74 of your 1040. If you paid more than you owed, you will get a refund. Otherwise, you need to make an additional payment. For example:
Taxes owed (Line 63) $73,212
Taxes paid (Line 74) $76,123
Amount overpaid $2,911
Pretty simple, right?
But if your employer reduced the amount withheld in 2018 per the new tax law, you might not have had enough withheld to cover your tax bill.
The easy solution is to complete a new W-4 and submit it to your employer. That’s the form that tells the employer about you/your family situation and how much to withhold. It comes with a worksheet to help you determine the correct withholding. If you live in a state like Massachusetts that has state income taxes, there is a corresponding form; contact your state department of revenue for the form.
Don’t want to figure it out? Enter “0” (zero) exemptions and you’ll have the maximum default amount withheld.
Already having the maximum amount withheld? You can have your employer withhold an additional amount from each paycheck (enter this amount on line 6 of the W-4).
If you submit this form now, most of your withholdings for the year will be at the new level.
Updating your W-4 works both ways, of course. If you are getting refunds that are still too large and you would rather not provide a free loan to the federal government, increase your withholdings so that less is withheld.
Caveats: There are always caveats, right? This only works well if your financial situation was pretty much the same last year and this year. If you got a new job with a big signing bonus and you also got severance and unemployment benefits from your old job before you left, you’ll likely need to take those factors into account before adjusting your withholding.
As always, check in with your CPA or tax professional for guidance first. They tend to know your specific tax situation in detail.
Need more info? Give us a call. We’re here to help.
Lyman H. Jackson
The 2019 W-4 is located here: https://www.irs.gov/pub/irs-pdf/fw4.pdf
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