With the upcoming release of the newly drafted Form W-4, people may need to rethink their approach to filing taxes, especially how much they withhold. By the end of May, the Internal Revenue Service should have a draft of the new tax form — that is expected to be in use for 2020 — available for public comment.
This new form will reflect changes made with the Tax Cuts and Jobs Act, which include nearly doubled standard deductions, elimination of personal exemptions and limits on itemized deductions. The Treasury Department and the IRS have updated withholding tables to coincide with these changes.
What all this means is that employees can expect to spend more time filing returns, according to Pete Isberg, head of government relations at ADP, a payroll company.
“If you want to get the withholding right, it will work like the tax return itself,” Isberg told CNBC. “There will be input areas that look more like a 1040 summary than the old Form W-4.”
It’s never too early to start considering taxes, so here’s an approach to make sure you get the most out of your return while also ensuring you are withholding the correct amount, thereby eliminating the surprise of a nasty bill next tax season.
Per CNBC:
Get last year’s tax return
He anticipates that in order to fill out the new W-4, employees will need to know their total deductions from the prior year, the tax credits they can expect to claim in the upcoming year, as well as additional sources of household income — including their spouse’s earnings.
“People don’t generally remember their total deductions off the top of their head, so it’s not going to be super easy to do,” Isberg said. “But it’s going to be more accurate.”
In general, tax withholding is a balancing act for filers.
If you withhold far too much, you get a large refund the following year. But you’ve also given the government an interest-free loan.
Withhold too little, and you take home more cash in your paycheck. But you may owe the IRS next spring.
This year marked the first time filers submitted returns under the new tax law, and some wound up with smaller-than-expected refunds. Others owed the tax man.
“They got more money in their pockets during the year, and they received smaller refunds,” said David Desmarais, CPA and member of the American Institute of CPAs’ personal financial planning executive committee.
In all, the IRS issued 101.6 million refunds as of May 10, down about 1% from last year. The average refund check was $2,729, down from $2,778 last year, according to the IRS.
Prep for 2019
We’re coming up on the halfway mark of 2019, so if you were unhappy with your 2018 return, you’re running out of time to avoid a similar outcome next year.
The IRS is reminding taxpayers to take a closer look at their withholding and ensure they’re paying sufficient taxes for 2019.
“Two-income families and people with multiple jobs may be more vulnerable to being underwithheld or overwithheld following these major law changes,” the agency said in a statement.
Work with your CPA or hash out the details on the online IRS withholding calculator to figure out how much federal income tax to deduct from your pay.
Here are a few types of taxpayers who should pay close attention to their withholding:
• Retirees: You still need to reevaluate your withholding. Use Form W-4V to withhold a flat rate from your Social Security check or Form W-4P to withhold from your pension.
• Families with dependents: Previously, it may have made sense for families to have less tax withheld from their pay if they had dependents.
However, the law has done away with personal and dependent exemptions. It also broadened the applicability of the child tax credit to include higher-income households.
If you haven’t already made these updates to your withholding and you owed taxes in 2018, review your W-4 now.
• Former itemizers: Under the old tax law, people who itemized their tax returns may have withheld less tax from their pay.
However, fewer people are expected to itemize under the new law, so they should review their W-4s. That’s because the standard deduction has been nearly doubled to $12,000 for singles and $24,000 for married couples who file jointly (2018).
• W-2 employees with side gigs: Got a side gig or a summer job in addition to your 9-to-5? Odds are that you aren’t withholding enough in taxes to cover both streams of income.