The tax deadline is 6 days away (April 18). Did you get a surprise when finding out the results of your tax return for the year? Did you owe money? Was this something you weren’t expecting? One of the causes could be your tax withholding from your paycheck.
The IRS has a withholding calculator that will help you determine how much should be withheld from your paycheck based on amount you want refunded or to owe at tax filing. The calculator can be found at Tax Withholding Estimator | Internal Revenue Service (irs.gov). It is a good practice to check your withholding if you have had a major life change (examples: marriage, promotion, new side income). When you check your withholding, you can change your withholding with your employer if needed by submitting Form W-4 to your employer. By making changes to withholding, you can ease the burden when the tax filing deadline rolls around.
Another reason to adjust your withholding is to avoid underpayment penalties imposed by the IRS. The IRS charges an underpayment penalty if you do not pay in either 100% of last year’s tax or 90% of this year’s tax if your income is. If your adjusted gross income is greater than $150,000 for those filing jointly, you are charged an underpayment penalty is you do not pay in the smaller of 110% of last year’s tax or 90% of current year’s tax. The penalty is based on the amount of underpayment.
Tax Reform of 2018 brought in changes to Form W-4. The IRS adjusted the withholding rates to ideally have employees pay the correct amount in withholdings to where taxpayers didn’t receive a refund and didn’t have to pay a balance based off wages. With tax reform, the standard deduction was increased, personal exemptions were repealed, and the tax rate brackets changed. If your W4 was submitted before 2018, your withholding is being calculated based on outdated tax laws.
Our trusted advisors are here to guide you through this complex issue and help you determine the appropriate amount to be withheld on each paycheck. Should you have questions or concerns, please do not hesitate to reach out to one of our trusted advisors.