Tax Withholding Tables: Don't Rely on Them
Many of us have experienced that panicked moment at a new job when faced with filling out a tax withholding form (W-4). Oftentimes, we stick with the same number of allowances that seemed to “work” in the past, but we don’t really know why. We cross our fingers that we’ll get a refund instead of taking steps to ensure we are on track.
The number of allowances you indicate on your tax form relates to generalized withholding tables created by the IRS. These tables are not one-size-fits-all; in fact, they’re not even one-size-fits-most! Each taxpayer’s situation is unique, making it impossible to come up with an easy-to-use formula that will work for everyone.
In early 2018, the IRS made updates to the withholding tables in an attempt to align them more closely with the new tax brackets and standard deductions introduced by the Tax Cuts and Jobs Act of 2017. In doing so, many taxpayers who didn’t make changes to their W-4 form saw a decrease in the the amount of money being withheld from their paychecks. As a result, some taxpayers were met with unexpectedly large tax bills and penalties for underwithholding.
Planning for 2019:You’ll Be Happier for It
Now that the 2018 tax season is coming to a close, we encourage everyone to check in on how you are faring for 2019. We especially encourage it if one of the following applies to you:
- You received a large refund for 201;
- You paid a large tax bill for 2018;
- You are an independent contractor;
- You have or will experience a major life event in 2019 (marriage, new child, new home, etc…);
- You’ve itemized in the past but took the higher standard deduction in 2018;
- You have more than one job in your household; or.
- You receive a pension or Social Security.
It is possible to know what you’ll be seeing on your tax return. Planning can save you a considerable amount of money and time. Rather than waiting for a large refund or fretting a tax bill, why not put that money to work for you each month? An $8000 refund could have been more than $650 a month in your pocket! That money could have been better spent on savings or planning a vacation. Instead, we often hear clients say they are going to use their refund to pay off their credit card bills!
If you are interested in more guidance on this topic, please ask us how we can help.
This is the first article in the Tax & Financial Planning Series “Taking Charge of Your Pay Day”. The next topic will be on Health Savings Accounts.