Did you owe taxes this year? Here's how to adjust your tax withholding (Step-By-Step Instructions)
As you've seen in our past blogs, the changes to the tax law under President Trump are affecting many Americans withholding's this tax season. Many American's are under withheld and in result seeing more in their paycheck but less come back in April. While you can't go back in time and change your W-4 for this filing season, it is never too early to start reassessing your W-4 for 2019 to avoid owing taxes next year.
We have recently completed several tax projections and withholding adjustments for our clients. We'll take you through step-by-step by starting with the IRS Withholding's Calculator.
Step 1: Figure out how you'll be filing
The first step is to check your withholding and find out how much you should be withholding. You'll want to visit the IRS Withholding's Calculator and start from there. (LINK: https://www.irs.gov/individuals/irs-withholding-calculator).
The Withholding's Calculator guides you in the right direction. First, you'll be asked how you'll be filing (single, married joint, married separate, head of household, or as a qualifying widow) and if anyone can claim you as a dependent.
Confused on who you can claim as a dependent? The IRS has a link on that here (LINK: https://www.irs.gov/help/ita/whom-may-i-claim-as-a-dependent).
Step 2: Update your general information
Next, you'll be asked a series of questions to update general information such as:
Total number of jobs: Fill out the number of jobs you are currently or will be employed at this year. It's important to note that if you're starting a new job or adding on a second job in the foreseeable future, you must account for this on your W-4. Often times, individuals who work multiple jobs need to properly reassess their withholding's due to income differences.
Tax-Deferred Retirement Plan: Check this box if you contributed to a 401K.
Cafeteria/Other Pre-Tax Plan: Check this box if you contributed to any health insurance, dental, life, etc that are pre-tax.
Step 3: Account for Child Tax Credit and Other Credits
Here, you'll want to select the number of qualifying children and also account for the dollar amount you spend on work-related child and dependent care expenses (ex. Child, earned income and dependent care credit). The child tax credit was increased to $2,000 this year per child and up to $1,400 "refundable". Refundable means that even if you don't have a tax liability, you'll still receive a $1,400 dollar for dollar credit!
Step 4: Fill out your Wage Income, Withholding, Unearned Income, and any Adjustments
The next page will populate another set of questions about total gross wages jobs, any bonuses you've earned, total contributions to your 401K, and more. You'll want to have your pay stubs, 401K, and IRA information handy for this.
Some FAQs when it comes to this page:
For your 401K: Only calculate how much you contribute, do not include what your company matches.
If you are starting a new job after January: you are going to have to calculate and mark how much you'll make for the remainder of the year instead of your annual salary.
Traditional IRA or Educational Loan Interests: account for this under "Adjustments" section.
Step 5: Deductions
The standard deduction has been doubled across the board. The rule is you take the greater of either the standard deduction or itemized deductions. We are finding that with the $10,000 SALT cap, the only taxpayers eligible to itemize are those who have a decent sized mortgage on your residence.
The doubling the standard deduction is one the main reasons for taxpayers being under withheld this tax season. For example: take two married individuals that each make $100,000. Go to the withholding tables, and take your standard deduction for married filing joint (24,000) bringing taxable income down to $76,000. For a joint couple, 76k puts you in in around the 12% tax bracket range according to the tax tables. The problem is that it's not taking the spouses income into account. When it comes time to file, combining the two incomes will put you in a much higher bracket than 12% resulting in under tax withholding.
Step 6: Get your results and fill out your W-4!
You can fill it out electronically or print out a paper copy. Once finished, give this to your employer and you're done!
If you need any help, assistance or clarification about how to properly fill out your withholding forms and adjust your withholding's, don't hesitate to give us a call!
-Keith Boyer, CPA