When you take a new job as an employee, there is usually a bunch of paperwork to complete to get you set up and settled in. This includes your W-4 tax form, which determines how much your new employer will withhold from each paycheck. If you don’t know or don’t recall what your W-4 says about your withholding, the recent tax overhaul makes it imperative that you find out and make any necessary adjustments or else you could face an unwelcome surprise next year.
Why You Need to Review Your W-4 in Light of the New 2018 Tax Law
How the changes to the tax code will affect each individual taxpayer will vary wildly depending on the amount of the individual’s or couple’s income, where they live, and the size of their family. But the bottom line is that an expected federal tax refund can turn into a federal tax liability if withholding is not adjusted properly. That’s because any benefits the tax overhaul may bestow on the federal level can easily be consumed by higher obligations or fewer available deductions for state and local taxes.
A recent Wall Street Journal article contained an insightful example of how this dynamic can play out:
Sarah is a New York resident. For 2017, she had $200,000 of wages and other income and $33,000 of itemized deductions, including $28,000 for state and local taxes. She owes about $41,400 of federal tax, and her withholding was set so that she’ll receive a tax refund for 2017 of about $100.
For 2018, Sarah has the same income and deductions, and she doesn’t adjust her withholding to account for the loss of $18,000 in state and local tax deductions. Her take-home pay rises by $5,300, reflecting the lower withholding in the 2018 tables.
The overhaul lowers Sarah’s total federal income-tax bill by about $520. But because her withholding went down so much, she’ll owe the IRS about $4,700 when she files in spring 2019.
New W-4 Form and Tax Withholding Calculator
Of course, the foregoing example is simply one of many ways reductions in deductions and other changes can intersect with the withholding set forth in your existing W-4. The new tax law also has brought a new W-4 form which you will need to complete if you make any changes to your withholding for 2018.
Additionally, the IRS has provided a new withholding calculator to assist taxpayers in determining the optimal withholding amounts. This tool will ask you to estimate values of your 2018 income, the number of children you will claim for the Child Tax Credit and Earned Income Tax Credit, and other items that will affect your 2018 taxes.
The calculator can be useful to individuals even if they are not W-2 employees, such as self-employed business owners, pension recipients, Social Security recipients and filers paying estimated tax.
Updating your W-4 in 2018 Could save you the headache of a larger tax bill in 2019
It’s more important than ever to pay attention to your W-4. How you complete this critical tax document will play an even larger role in your overall tax picture. Make sure that you are comfortable and confident in your withholding amounts, and consult an experienced tax professional if you have any questions.