Whew, you filed your taxes on April 15, just in time. Now you can kick back, relax and forget about the IRS until next April 14th, right? Not so fast! Despite the fact that you’d rather be thinking about Summer vacation than taxes, now is a great time to start planning for next year. Why? Because last year’s taxes are probably still fresh in your mind and you have a few month’s worth of paychecks behind you. Reviewing your form W-4 to make sure you are withholding the proper amount from your pay is one thing you should definitely do. That’s because 2018 will be the first year you will file taxes under the changes created by tax reform, better known as the Tax Cuts and Jobs Act (TCJA). All of the changes made under the TCJA will likely mean that your taxes will be much different next year. By reviewing your form W-4 now you may avoid some surprises next April. You might even find that you can increase your take home pay in 2018!
Help From The IRS
Reviewing your form W-4 isn’t nearly as hard as it once was. The IRS has an online calculator that you can use to estimate your withholding. And, with the passage of the TCJA, the IRS has released an updated calculator that reflects changes under the new tax law. The new withholding calculator can be found here (https://www.irs.gov/individuals/irs-withholding-calculator
). Using the calculator means that you won’t have to use the paper-based W-4 worksheets. The IRS encourages taxpayers who fall into the following groups to double-check their withholding:
- Two-income families
- Anyone with two or more jobs at the same time or who only work for part of the year
- Taxpayers with children who claim credits such as the Child Tax Credit
- Those who itemized deductions in 2017
- High income taxpayers and those with complex returns
As you can see, those five groups cover a lot of people! Even if you don’t fall into one of the groups it might be worthwhile to double-check things, just to make sure.
Using The Calculator
To use the calculator, you’ll need the most recent pay-stub for you and your spouse (if applicable). If you don’t have this information, don’t bother starting; it’s nearly impossible without it. You should also have a copy of your 2017 tax return. While not absolutely necessary, your tax return will help you estimate any potential deductions and credits. Finally, you will want to account for any other sources of income you expect to receive, as well as any anticipated deductions like mortgage interest, property taxes, etc. You will want to be as accurate as possible when estimating your income because underestimating can lead to a tax bill at the end of the year.
If you need help with any section of the calculator just click the hyper-linked text for pop-up help.
Page 1 & 2
The calculator starts by asking you for your filing status (single, married filing jointly, etc.) and whether you can be claimed as a dependent on someone else’s return. After that, you’ll go to page 2 and enter some more general information (total # of jobs, 401(k) or health insurance contributions, etc.) and then indicate whether you expect to claim any credits for 2018, such as the Child and Dependent Care Credit or the Child Tax Credit. The TCJA made major changes to the Child Tax Credit, including doubling the amount ($2,000 per qualifying child), increasing its refundable portion, and dramatically increasing the phase-out thresholds. In 2018, the credit does not begin to phase-out until adjusted gross income reaches $200,000 for single filers and $400,000 for married couples filing jointly. Compare that to 2017, where the credit began to disappear for married couples that earned more than $110,000 and you’ll see that’s a big difference (in your favor)! The TCJA also added an often overlooked $500 non-child dependent credit to help offset the loss of the personal exemption. The calculator will automatically calculate this credit based on your information.
On this page, you’ll enter information about your expected wages and bonuses for 2018. This is where having the current pay-stub becomes essential. In addition to wages, you’ll include your projected yearly contributions to any tax-deferred retirement plan, such as a 401(k) or 403(b) plan and any pre-tax cafeteria plan (e.g., any health insurance or flexible spending account plan). Find the amount you contribute per pay period and multiply it by the number of pay periods in a year. Your payroll statement may also have year-to-date information which makes this task much easier. Finally, enter the total federal income tax withheld from your pay this year and the rate withheld per pay period. For this step, do not include Social Security, Medicare, state, or local withholding. You’ll then enter information on any “nonwage income” such as interest, dividends, unemployment compensation and any net self-employment income you expect to receive.
The final section of the calculator asks about any estimated itemized deductions. This is where that copy of your 2017 return will come in handy. The calculator already takes into account the increased standard deduction for 2018 ($12,000 for individual and $24,000 for married couples filing jointly). It uses the larger of the two numbers (estimated itemized deductions vs. standard deduction) to estimate your taxes.
The Big Reveal
When all the information is entered, the calculator will give you the following information:
- Your anticipated 2018 income tax
- The amount that will be withheld if you do nothing, and whether you will receive a bill or a refund on that basis
- A withholding adjustment you can make to come closer to your anticipated 2018 income tax
- The amount of any refund or payment expected if the recommended changes are adopted
With the new tax law in place, your taxes will probably look much different next year. Because of that, it’s better to plan now than wait for a surprise next April. Reviewing your form w-4 is one way you can stay on top of your financial and tax situation. In fact, you may be able to adjust your withholding and take home additional pay immediately! All it takes is delivering an updated Form W-4 to your human resources or payroll department.
While giving yourself a “pay increase” by reducing the amount withheld is great, there is one thing to be aware of. If you do make a change to your W-4 and reduce your withholding (giving you an increase in your take home pay) for the rest of 2018 you will want to check your withholding in early 2019 to make sure you aren’t having too little withheld. Reviewing your form W-4 each year is a good habit to have, and the IRS calculator makes it easy to do.