We are halfway through the first year of the new Tax Cuts and Jobs Act, or TCJA, and now is a great time to review your tax withholdings on your paycheck to make sure you are on track.
If your withholding is too high, then you are essentially giving the IRS an interest-free loan. If your withholding is too low, you may be subject to penalty and interest when you file your 2018 tax return.
The TCJA made significant changes to the tax law for 2018, including increasing the standard deduction, eliminating personal exemptions and increasing the child tax credit. It also changed the tax brackets, reducing the top tax rate from 39.6 percent to 37 percent. With all of these changes, however, not everyone will see a reduction in their taxes.
When you start a new job you are required fill out Form W-4 to let your employer know how much you want withheld from your paycheck. Typically your amount of withholding is not updated on Form W-4 unless you have a significant change in your tax filing status, such as getting married or having a child. With the new tax law, however, everyone should be reviewing their Form W-4 and their paychecks to make sure withholdings are at the proper amounts.
The IRS created a withholding calculator in February to help taxpayers determine how much withholding should be deducted from their paycheck. The calculator covers a series of questions and then determines the number of allowances you should claim on your Form W-4.
Make sure to have a copy of your prior-year tax return and a most recent paystub handy when using the calculator. If you are married, you also should have a copy of your spouse’s paystub in order to properly determine household withholdings.
The IRS calculator isn’t perfect, but it will provide the guidance needed to make sure you are on the right track for proper withholding in 2018. You also should plan on filing out a new W-4 at the beginning of 2019 — especially if you made any changes to your withholding during the middle of 2018.
Now is the time review your paycheck and make sure you are on track for proper 2018 withholding.