Review Your Withholding Today to Prevent Tax Surprises Tomorrow

Young woman sitting at home and making home finances, with casual clothes.

With the kids back in school and before the madness of the holiday season sets in, now is a great time to conduct a quick review of your tax withholding status. In just a few steps you can determine if you will be in a good position at tax time in 2019 or if you should make adjustments now to avoid a nasty surprise in April.

The Tax Cuts and Jobs Act that was passed into law in December 2017 made several changes including:

  • Increasing the standard deduction
  • Eliminating personal exemptions
  • Increasing the Child Tax Credit
  • Limiting or discontinuing certain deductions
  • Changing the tax rates and brackets

Depending on your circumstances, one or more of these changes could leave you in a situation where your former withholding level is no longer correct. You could be paying more into the system than necessary, meaning you have less money to put to work for you with every paycheck. Alternatively, you could be having too little withheld from each paycheck, which will leave you with a tax burden that you will need to pay next year come tax time.

According to the IRS, individuals for whom any of the below apply are in particular risk of having current withholding be out of step with what is currently required.

  • Are a two-income family.
  • Have two or more jobs at the same time or only work part of the year.
  • Claim credits like the Child Tax Credit.
  • Have dependents age 17 or older.
  • Itemized deductions in 2017.
  • Have high income or a complex tax return.
  • Had a large tax refund or tax bill for 2017.

Tools for Reviewing your Withholding

To help put you in a better position, the IRS has created a free and easy-to-use online calculator. By gathering a few key pieces of information and investing just a few minutes, you could learn what changes you need to make during the final quarter of the year.

To get started, collect your most recent pay stub from all jobs that you have had this year. If you are a couple filing jointly, you will also need a copy of your spouse’s pay stubs. Having a copy of last year’s taxes handy will help to ensure that the estimates you enter into the calculator are as accurate as possible. The better the estimates are that you enter, the more useful and on-target the results will be.

The calculator steps through four relevant areas; General Information, Credits, Income and Adjustments.

General Information

This portion creates the framework for the rest of the calculations by gathering details on your planned filing status for 2018, the number of jobs in your household for 2018, and number of dependents. It also asks for age range and vision status.

Credits

Credits are items that reduce the overall amount of withholding in your paycheck due to things like child or elder care expenses. The calculator asks you to enter an estimate of expenses for Child & Dependent care. This is one of the areas where having last year’s taxes in-hand may help you to provide an accurate estimate for 2018. You are also asked to provide the number of children you plan to claim, earned income tax credit eligibility and the value of any other credits you may have.

Income

Your most recent pay stubs will provide you with the answers to the questions in this section that include:

  • Estimated annual income
  • Value of any bonuses paid or anticipated in 2018
  • Tax-deferred retirement contributions
  • Income tax withheld-to-date
  • Income tax withheld on last pay stub
  • Frequency of payments
  • Employment start and end dates

Keep in mind that for each of the above to get accurate results you need to complete this for each job held in 2018. This is also where you supply your estimate of any non-wage income you expect for the year from things such as dividends, interest or unemployment compensation.

Adjustments

Deductible IRA contributions, education loan interest or contributions or expenses for any of the following can also influence how much money should be withheld from each paycheck.

  • Medical and dental expenses
  • Taxes you paid
  • Interest you paid
  • Gifts to charity
  • Casualty losses

Once you complete the process, the calculator will provide you with guidance on whether your withholding amount is correct or if it should be adjusted. If changes are in order, it provides detailed recommendations on what the adjustments should be. Links to download any forms are included to make completing the task as easy as possible.

Take Action

Take the time now to do a quick withholding check. It may give you more money in your pocket as the holiday season approaches or provide you with the time you need to change gears and prevent unpleasant surprises come tax time.