Following the biggest set of tax law changes in over 30 years, the IRS continues to remind taxpayers to do a Paycheck Checkup to help make sure they are having the right amount of tax withheld.
What Changes Were Made?
The Tax Cuts and Jobs Act (TCJA), tax reform legislation enacted in December 2017, changed the way tax is calculated for the majority of taxpayers. Most TCJA changes took effect in 2018, and for most taxpayers, impacted the return they filed earlier this year. These changes will also apply to 2019 tax returns also filed in early 2020.
Among other things, the new law suspended the personal and dependency exemptions taxpayers claimed in the past. It also made the Child Tax Credit for dependent children, under the age of 17, available to a broader range of taxpayers by doubling the maximum credit from $1,000 to $2,000 per qualifying child and raising the income limits that apply. Since TCJA nearly doubled the standard deduction, less taxpayers need to itemize their deductions and new restrictions are being applied to many of these deductions, including state & local taxes, mortgage interest and miscellaneous itemized deductions.
What are the Results of These Changes?
Due to these changes, some taxpayers ended up receiving 2018 refunds that were larger or smaller than typically expected, while others unexpectedly owed additional tax when they filed earlier this year. Those who owed additional tax may need to increase or decrease the amount of tax they have taken out of their pay throughout the year.
How You Can Conduct a Paycheck Checkup
The best way to make sure you have the correct amount of tax withheld would be to utilize the IRS Withholding Calculator, available on IRS.gov, which allows yo to make adjustments following recent tax laws.
What is the IRS Withholding Calculator?
The Withholding Calculator enables taxpayers to get their tax withholding right by making sure these and other tax changes are built into their take-home pay. Taxpayers enter their deductions and credits as well as estimated income from other sources. It is recommended to have a copy of the 2018 tax return due earlier this year, as well as paystubs for you and your spouse, if married and filing jointly.
The calculator will then recommend the number of allowances the employee should claim on their Form W-4. In some instances, it will recommend there also be an additional flat-dollar amount withheld from each paycheck.
What if I Don’t Receive Wages?
While the Withholding Calculator is primarily designed for individuals who receive wages, it can also be helpful to some recipients of pension and annuity income. If the Withholding Calculator suggests a change, a new Form W-4 should be filled out and given to your respective employer as soon as possible. Recipients of pensions and annuities can make a change by filling out Form W-4P and giving it to their payer. These forms should not be sent to the IRS.
When Should I Check My Withholding?
It is recommended you check your withholding any time a major life change has taken place. Examples would be marriage, divorce, the birth of a child, purchasing a home, retiring, or starting college. Anyone who needs to make a withholding change should do so as soon as possible. This way, if a tax withholding adjustment is needed, the amount of tax that needs to be withheld can be spread across more paychecks remaining in the year. Procrastination can mean the remaining tax owed will need to be withheld from fewer paychecks so more will have to be taken from each one.