It might still feel like tax time is a long ways away. But there is a very important step that everyone who receives a paycheck should take, right now. If you haven’t looked at your tax-withholding amount lately, then you really can’t afford to put it off. Here’s why. Thanks to the Tax Cut and Jobs Act (TCJA) millions of people could be facing a big surprise when they file their returns.
Check Your Withholding
The Internal Revenue Service and the Government Accountability Office (GAO) both issued warnings recently regarding the upcoming tax season. Both agencies recommended American taxpayers update their current tax withholding forms — W-4 — before the year ends. That’s because, the new tax law comes with significant changes. In addition to some big tax cuts, the TCJA has also reduced some popular deductions that millions of Americans have grown accustomed to.
Are You Overpaying?
Because of those changes both the IRS and the GAO expect most taxpayers to either overpay or underpay this year. In fact, the GAO expects about 73 percent of all Americans who pay federal income taxes to overpay because their current withholding is to high. That’s a 3 percent increase over last year. Overpayment is more likely with high-income taxpayers, especially for those who file estimates. Because high earners will see greater tax cuts under the TCJA, they could also see a notable increase in their overpayments.
Overpaying might not sound too bad because that means you get an even bigger return. However, it also means you’ve been missing out on a lot more disposable income throughout the year. If nothing else, the government has been collecting interest on money that you could’ve been collecting interest on instead.
Could You Face an Unexpected Tax Bill?
On the other end of the spectrum, the news could be more unsettling for those who are underpaying. The GAO expects 21 percent of the nation’s 138 million taxpayers to underpay. That means millions could end up with a smaller return, or even worse, an unexpected tax bill when they file in 2019. For taxpayers not expecting a big tax bill, this could put them in a real bind.
Use the Tax Withholding Calculator
So, what should you do? The good news is there is a fairly easy remedy for this problem. But people need to do it. The IRS recently announced that it “urges taxpayers who haven’t yet done a ‘Paycheck Checkup’ to take a few minutes to see if they are having the right amount of tax withholding following major changes in the tax law.” The easiest way to avoid either overpaying or underpaying is using the IRS’s tax calculator to determine how much you should be withholding from each paycheck. You can access the withholding calculator here.
Just Do it!
Add it all up and more than 90 percent of all taxpayers are likely going to either overpay or underpay this tax season. So, if you haven’t already, then now is the time to check your W-4 withholding.