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Updated on Friday, March 9, 2018
It is advised that wage earners update their W-4 form whenever a major life event occurs, like a recent marriage or the birth of a child. It’s particularly important this year, however, to review your withholdings as the new tax law went into effect Jan. 1.
Under the new tax law, many Americans saw their tax brackets change, with the standard deduction almost doubling for both individuals and married couples, as well as changes to other common tax credits. These changes could affect how many allowances you should claim and how much tax should be withheld from your paycheck.
For many taxpayers, if they leave their W-4 form unchanged, it’s possible their withholdings will be off and, they could owe — or be owed — more taxes than usual. Depending on your personal preference, getting a big tax bill vs. giving Uncle Sam an interest-free loan for the year may not bother you as much. But for others, withholding too much in taxes throughout the year — that is, paying more than you really owe and getting a refund later — could mean losing access to much-needed extra funds during the year.
In an ideal situation, tax experts say it’s best if you owe no taxes at all and get a small refund.
But where do you even begin to figure out whether or not you should make an adjustment?
We’ll offer answers to key questions you may have in this post.
Experts we spoke with for this story have one common bit of advice for taxpayers: Check your paychecks and, if needed, adjust your tax withholdings for 2018 sooner rather than later.
Key terms to know
W-4: On a W-4 form, employees provide personal information, such as marital status, as well as any allowances you’d like to claim or additional income tax you’d like withheld. Employers use this information to determine how much tax to withhold for that employee.
Allowances: The more allowances you claim on your W-4, the less money will be withheld from your income in taxes throughout the year. If you want more money withheld, claim fewer allowances on your W-4.
Withholdings: Employees pay their federal income tax through tax withholdings, which are taken out of their paycheck. Tax may also be withheld from bonuses, commissions and other forms of income.
Standard deduction: The standard deduction is a flat dollar amount that reduces your taxable income and varies according to your filing status. You can only claim the standard deduction if you don’t itemize your taxes. The standard deduction nearly doubles under the new tax law.
- Single: $12,000
- Head of household: $18,000
- Married couples filing jointly: $24,000
Itemized deductions: Some expenses are tax deductible, such as charitable donations or interest paid on student loans. If you add up tax deductible expenses you paid throughout the year and the amount is larger than the standard deduction, you will likely choose to take the itemized deductions instead.
Should you adjust your withholdings for 2018?
First, a quick primer on the importance of the W-4 form: The higher the number of allowances you claim on your W-4, the lower your tax withholding is throughout the year. Therefore, you can expect a bigger paycheck.
As a result of the tax changes, the majority of Americans will see a slight bump in their take-home pay, Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting, told MagnifyMoney.
“If they don’t adjust their withholding, they are likely to see a bigger paycheck,” Luscombe said. “If they file a revised W-4, then that could mean even a bigger paycheck. But it really depends on what they put on the new W-4.”
Luscombe said it’s important that employees — especially those in more complex tax situations — update their W-4 form, making sure their withholding is as accurate as possible.
TurboTax CPA Lisa Greene Lewis said those who usually claimed the standard deduction may see fewer changes under the new tax law than itemizers unless major personal or financial events are happening this year. The biggest change they will see is a bigger standard deduction. The population of taxpayers claiming the standard deduction is expected to grow under the new tax law as a result of the almost doubling of the standard deduction and the elimination or reduction of some itemized deductions.
The story may be different if you’re planning to itemize. That’s because the new IRS withholding tables, which payroll departments use to determine how much money to take out or your paycheck, assumes each worker will claim the cut-and-dried standard deduction. But the tables don’t take into account all the individual factors that might be involved, such as the number of children the taxpayer has, experts say.
Here are some of the groups who might want to make an adjustment:
People who prefer a smaller refund
Under the new tax law, it’s expected many Americans will see a bigger paycheck than usual. That means, if they make no changes to the current withholdings and have the same amount of taxes withheld as 2017, they may get a bigger refund next year.
It’s worth pointing out that some people may actually prefer things this way. They may see their annual tax refund as a form of forced savings or a nice windfall they can use to catch up on debt or cover their annual family vacation. Nearly 112 million tax filers received an average tax refund of $2,895 last year, according to the IRS.
“Some people seem to not mind giving an interest-free loans to the government and like getting a big refund at the end,” Luscombe said. “I guess maybe they think the government is better at saving their money than they are.”
But if you prefer a smaller tax refund later — especially if you plan on itemizing and claiming deductions for 2018 — you may want to revise your W-4, increasing the number of allowances you claim to lower the withholding even further, Luscombe added.
People who itemize their deductions
Because the standard deduction was nearly doubled under the new tax law, many people who used to claim itemized deductions may now have to claim the standard deduction for 2018. When you know you’re going to claim deductions on your taxes, you might choose to have less taxes withheld throughout the year, experts say.
If you were in this camp of people before, you might very well decide that it makes more sense to claim the increased standard deduction in lieu of itemizing in 2018 if the standard deduction is now more than your itemized deductions. And in that case, certain deductions are gone or reduced. So you need to go back to your W-4 and make an adjustment so more taxes are withheld than before, Lewis said
Even before the biggest tax reform legislation in a generation passed, itemizers always had a more complicated time around tax season.
In a recent MagnifyMoney study, we analyzed IRS tax data for 100 of the largest U.S. metros over a five-year period (2012-2016). We found that itemizers were more likely to owe taxes than those who claimed the standard deduction.
The new tax law gives itemizers just one more reason to carefully estimate their 2018 tax obligation to avoid owing money to the government.
Families with children
Married couples with children should also move quickly to figure out their 2018 tax liability due to the elimination of personal exemptions and the increase in child tax credit.
In the past, taxpayers could reduce their adjusted gross income by claiming personal exemptions — generally for the taxpayer, their spouse and their dependents. Married people who filed jointly could claim up to five personal exemptions if they have three children, also allowing five withholding allowances or more if they itemize, Lewis said.
Things will be a little more complicated this year. While the personal exemptions are gone, the child tax credit — which allows parents to offset the cost of raising children — doubles to $2,000 per qualifying child, up from $1,000.
“If [couples who itemize] didn’t change their withholding for 2018, they could wind up owing money to the government, because they are going to see more money in their paycheck, but it depends on their deductions,” Lewis said. “If they normally claimed the standard deduction, they may not because the IRS says their new withholding tables incorporate [that situation].”
How make sure your withholdings are correct
We get it, this stuff can be incredibly difficult to understand.
One way to get your bearings and a general sense of whether you should adjust your withholdings is to use the new IRS withholding worksheet and calculator.
April Walker, lead manager on the tax practice and ethics team of the American Institute of CPAs, suggests taxpayers go through the worksheet on the new W-4 and fill it out based on your personal and financial situation. You will be able to figure out the number of allowances you can take for 2018, which may or may not change from 2017.
Another strategy is to take a look at your most recent paycheck to see how much was taken out in federal taxes. Compare that number with the number you get from the IRS tax withholding calculator, which can project your 2018 tax obligation. Walker said that’s a pretty general way of making sure that your withholding is in line with what your actual liability will be.
If your withholding seems to be too low compared with your estimated 2018 liability, you can adjust the number of allowances down, Walker said. There is also an option to withhold more if you are already claiming zero allowances. If it looks like you are withholding too much, you can increase the number of allowances so that your withholding will decrease.
Because of the delay in starting the new withholding rules (companies were required to comply with the new withholding rules by Feb. 28), many people were basically withheld under the rules from the old tax law for January and February. So in some cases, employees may have more withholding than they otherwise should have had under the new rules, Luscombe said.
This doesn’t mean you paid more taxes than you should have. The withholdings for the first two months will be reflected in your tax return in 2019. But they might be higher than they should have been.
If you surely don’t want to lend Uncle Sam even one more penny than you should, Luscombe said you can compare your withholdings in March with your withholdings in January. Depending on how much the difference is, you could claim more allowances in the following months to offset the higher withholdings in January and February.
If you still have questions about your withholdings, you may want to seek out a CPA for help.