The IRS is strongly urging all taxpayers to complete a “Paycheck Checkup” to determine if their employer is withholding the correct amount of income tax. Due to the changes in the tax law, the withholding tables may not be working as in prior years.
Major changes in the tax law will have impacts on the amount of federal income tax folks will owe for 2018. The biggest changes are:
- Reduced tax rates and changes in the tax brackets.
- Personal exemptions are gone.
- Standard deduction has increased.
- The Child Tax Credit has increased and is also expanded to include more families.
- There is a new credit for other dependents.
- Some deductions have been eliminated or reduced.
Who should perform a “Paycheck Checkup?” Here are four examples of those who should check their withholding.
Taxpayers Who Received a Big Refund
If you received a large refund, you essentially gave the US government an interest-free loan. By changing your withholding, you could have that money in your pocket throughout the year rather than getting it in a big chunk when you file your taxes.
Taxpayers Who Itemize
The new tax law made several changes that affect taxpayers who itemize. These include:
- Standard deduction increased so many people may not be able to itemize.
- New $10,000 limit on the deduction for state and local property taxes. This would include income taxes, real estate taxes, and personal property taxes.
- New limits on the deductibility of some mortgage interest and interest on home equity debt.
- Higher limits for charitable contributions.
- No deduction for miscellaneous itemized deductions. These include investment expenses and un-reimbursed employee business expenses.
If you have filed Schedule A (itemized deductions) in the past, you should complete the Paycheck Checkup to ensure you don’t have an unexpected tax bill next April.
Taxpayers with Children or Other Dependents
As mentioned earlier, the Child Tax Credit has been expanded to include more taxpayers and has also been increased. In addition, there is a new tax credit for families with dependents who can’t be claimed for the Child Tax Credit. These dependents could include children who have reached age 17 or parents or other qualifying relatives that the taxpayer is supporting. Families with dependents should review their eligibility for the Child Tax Credit and the new dependent credit. Once eligibility is determined, the taxpayer should complete the Paycheck Checkup. Many families are finding they are able to keep more money out of their paychecks.
Taxpayers Who Own a Small Business
Small business owners often make quarterly tax payments to cover their income tax and self-employment tax obligations. These taxpayers may benefit from the Paycheck Checkup particularly if they are not receiving a regular salary from their business. Page 24 of Publication 505 will help these taxpayers determine if they are making the correct estimated tax payments.
To complete the “Paycheck Checkup,”, go to the IRS Withholding Calculator. You will need your completed 2017 federal tax return (Form 1040) and your most recent pay stubs. If your income or circumstances change during the tax year, you should check your withholding again to ensure you still have the correct amount of tax withheld.
No one likes to owe money to the government when they file their tax return. Equally upsetting is getting a large refund, knowing you could have used that money throughout the year. Performing a Paycheck Checkup now will help you avoid unwanted surprises and help keep more money in your pocket! If you’d like to know more about the updated tax laws, please reach out. I’m happy to answer any questions.
Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.