More US taxpayers will owe money to the IRS next year because they’re not withholding enough from the paychecks.
A new report from the Government Accountability Office says taxes for 30 million Americans — that’s 21 percent of taxpayers — are being under-withheld by their employers because of the new tax laws that went into effect this year. That means they will receive a bigger paycheck now but will owe at tax time.
According to the GAO, 73 percent of taxpayers are being over-withheld and will receive a refund. Before changes to the tax laws, about 18 percent of taxpayers were expected to have experienced under-withholding this year, and 76 percent would have been over-withheld.
Who should be concerned? According to the GAO, that’s a hypothetical taxpayer who is married with two children and earning $180,000 annually — $20,000 of which comes from non-wage income and who itemizes deductions.
According to earlier surveys, about three-fourths of taxpayers had not updated their paycheck withholdings since the IRS updated its withholding tables in February.
It’s recommended that taxpayers review withholding amounts at the beginning of each year. Significant events such as marriage, divorce, the birth or adoption of a child, retirement, or the purchase of new home will affect tax liability. Other changes that affect income such as losing a job, taking on an additional job, or an increase or decrease in salary should prompt a review of withholding any time in the year.
Adjustments to income such as a student loan interest deduction or alimony also will affect tax liability. Changes in itemized deductions or tax credits — including medical expenses, education credits, and child tax credits — should also be a signal to review withholding.
The IRS provides a withholding calculator, which can help prevent employees from having too little or too much withheld from their paycheck. Along with the online calculator come a few tips from the IRS.
It says taxpayers should:
- Use their most recent pay stubs and federal income tax return to help estimate income and other items for 2018. Keep in mind the new tax law made significant changes to itemized deductions.
- Fill in all information that applies to their situations.
- Make estimates when necessary, but keep in mind the results are only as accurate as the information entered.
- Check the information links embedded in the program whenever taxpayers have questions.
- Print the final screen that summarizes their entries and the results. Use the results from the withholding calculator to determine if they should complete a new Form W-4, Employee’s Withholding Allowance Certificate.
Withholding could especially be vital for Americans who receive pensions. A little-noticed effect of last year’s tax overhaul is that many pension payments are now larger, reflecting the new lower tax rates in effect for 2018. But this bump-up increases the risk that recipients will be under-withheld at tax time next year.
If you’d like to discuss ways to save on your next tax filing, reach out to us at KraftCPAs. We’ll be happy to chat more.