With the passage of the Tax Cuts and Jobs Act of 2017 signed into law in December, many wage earners are left to struggle with the question: how do I know what to withhold in 2018?
Fortunately, the Internal Revenue Service (IRS) has anticipated that question, and has provided a handy tool to be used in calculating your tax implications for 2018.
The IRS withholding calculator takes the guesswork out of determining how you can plan to meet your tax burden under the new legislation to avoid an unexpected tax bill, and to benefit from the reduced withholding tables.
You don’t want the surprise of higher-than-anticipated liability, and you certainly don’t want to give Uncle Sam an interest-free loan, either. Using the withholding calculator will help you ensure you have enough of each paycheck put aside, while still reaping the benefits of the tax reductions.
Withholding Table Updates
With the timing of these last-minute tax revisions, the IRS could not publish updated tables for withholding in time for employers to implement them for the first paychecks of the year.
This information was just made available on February 28th of 2018, along with updated W-4 forms and the associated withholding calculators.
Your employer may have applied these withholding tables retroactively to the beginning of the year. If not, you may already have extra taxes withheld prior to the changes in the IRS tables, such that you can adjust your withholding for the remainder of the year accordingly.
How This Affects You
Every tax-payer’s situation is different, due to many circumstances:
- Multiple wage-earners in the family
- Change in marital status
- Eligibility for credits such as Child Tax Credit or Earned Income Tax Credit
- Working multiple jobs that each have their own W-4 designations
Putting the IRS withholding calculator to use with your own personal information is the best way to be sure you’ve planned as closely as possible for the taxes that will be due for tax year 2018.
Using the Tax Calculator
To be as accurate and useful as possible, the IRS calculator needs some specific information from you:
- Estimated income – from all sources
- Number of dependents
- Any credits that you may be eligible for
Take the time to pull out your last tax return, so that you have the best information available for working with the calculator. The results will only be as good as the information you provide.
One thing you need not be concerned about – the IRS does not request personal information such as taxpayer ID, bank accounts, or social security numbers for using the calculator, and the information you provide is not retained.
Will it work for you?
Yes, the withholding calculator will work for most taxpayers. Those with returns of a more complex nature such as self-employed workers, those subject to alternative minimum tax, or income from investments such as qualified dividends or long-term capital gains may need to refer to IRS Publication 505 – Tax Withholding and Estimated Tax – for more details. This publication should be updated with new withholding information in early Spring.
Steps You Should Take Now
If you have not done so already, there are steps you should take to ensure your withholding and tax liability are very close to your expectations:
- Gather your tax return and relevant financial documents for putting the withholding calculator through its paces
- Review your results for reasonability – if the change is far from your expectations, you may have provided inaccurate information that skewed the calculations
- Review your W-4 to ensure that your withholding is at the level that will match your needs for taxes due at the end of the year. Keep in mind that many employers utilize federal withholding requests to dictate how much state or other taxes are withheld. This may impact the specification chosen for your W-4.
Once you’ve used the calculator and are satisfied with the results, contact your employer or use their online services to update your W-4 preferences.
Many wage-earners have circumstances that change throughout the year:
- Significant changes in income
- Getting married or divorced
- Birth of children or other changes in dependents
Each of these can have a real impact on your tax liability, warranting a revisit to the tax calculators. The accuracy of these tools is in relationship to the information provided, so be certain to provide as much detail and best estimates of each item requested.
Be sure to revisit your withholding again for tax year 2019. Since the tables for 2018 changed mid-year, the tax calculator should be reviewed again for the full year as you prepare for 2019. Determine your course for the new year based on:
- How your tax liability turned out for 2018
- Any changes in your tax situation that you foresee in the coming year
- The latest results you get from using the tax calculator for 2019
Additionally, it may benefit you to consult with your tax advisor to make sure the right choices are made for withholding, that meet your own unique tax situation.
Feature Image via MileIQ