Did you know that the tax law actually changes every year? Yep. Some years it changes a little, some years it changes a lot (ahem 2018). It is for this reason that we recommend you re-evaluate your withholdings each year.
Not paying attention to your withholdings could cost you in the long run – this year it’s especially true. Did you notice a raise in your paycheck in late January? Don’t get too excited – the boss didn’t give you a raise and neither did the government. The increase is because of the change to the IRS withholding tables. So, the increase you see is due to a decrease in your federal withholding.
Sounds like a good thing right? It could actually be detrimental to the outcome of your tax year 2018 tax return. This is why we recommend that you check your withholding amounts each year.
Some employers will adjust withholding automatically but it’s not a guarantee. And while it’s nice to have the extra money, if you’re not prepared for a tax bill next year, it could be a very alarming surprise.
So What’s With the Change?
The tax year 2018 tax code changes included new withholdings amounts, which were released by the IRS on January 25, 2018. However, a new Form W-4 was not released; therefore, the only Form W-4 available at this time is based on 2017 tax laws and uses deductions no longer available in tax year 2018. For this reason, employers are forced to use the Form W-4 currently on file for their employees; thus resulting in more take-home pay and less federal withholdings. Due to the 2018 tax law changes affecting personal exemptions and standard deductions, this could lead to financial trouble for taxpayers when filing tax year 2018 returns.
How to Avoid an Unexpected Tax Bill
If you’re unprepared for a tax bill next year, and don’t have the funds to pay, you could end up owing interest and penalties – adding to the amount owed for taxes. If left uncorrected, it could lead to a pattern of owing taxes in future years.
It is extremely important that you double check your current withholding amounts. If you are unsure of how to double check your withholdings, seek the advice of a trusted professional tax preparer (like Peoples Tax).
When Will New Forms Be Released?
Unfortunately, the IRS is not expected to release a new Form W-4 until later this year. However, the IRS is expected to release an online calculator in late February, meant to assist taxpayers in determining if their withholdings are adequate for tax year 2018.
In the meantime, you can request that your employer deduct the increased amount received in your paychecks as additional federal withholding. Once you’ve had an opportunity to consult with a tax professional, you can adjust your withholdings as necessary. Remember – changes in withholdings can take place at any time and as many times as necessary throughout the year.
Here are some examples based on various income levels to demonstrate how the new tax withholding amounts might affect you. The examples demonstrate the differences in 2017 federal withholdings and 2018 federal withholdings. For purposes of these examples, the taxpayer is Single, claiming 0 Federal Withholding Allowances, and receives a weekly paycheck. As illustrated below, a small decrease in federal withholdings can have a huge impact when considered for the entire year.
Due to the (many) tax law changes, it is extremely important that you make the right tax moves this year to avoid costly financial consequences. Make an appointment with one of our tax pros today so you can properly prepare.