Following the biggest set of tax law changes in more than 30 years, the Internal Revenue Service continues to remind taxpayers to do a Paycheck Checkup to help make sure they are having the right amount of tax withheld.
The Tax Cuts and Jobs Act (TCJA), tax reform legislation enacted in December 2017, changed the way tax is calculated for most taxpayers. By visiting the IRS Withholding Calculator, available on IRS.gov, taxpayers can make adjustments following recent tax laws that may affect them, including the larger standard deduction, the increased Child Tax Credit or Other Dependent Credit.
Most TCJA changes took effect in 2018 and, for most taxpayers, affected the return they filed earlier this year. Those changes will also apply to 2019 tax returns 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 substantially raising the income limits that apply. Because TCJA nearly doubled the standard deduction, fewer taxpayers need to itemize their deductions and new restrictions apply to many of these deductions, such as state and local taxes, mortgage interest and miscellaneous itemized deductions.
As a result, some taxpayers ended up receiving 2018 refunds that were larger or smaller than expected, while others unexpectedly owed additional tax when they filed earlier this year. Those taxpayers may need to raise or lower the amount of tax they have taken out of their pay throughout the year.
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 into this handy online tool, and estimate income from other sources, such as jobs their spouses hold, bank interest, second jobs and gig-economy work. To use the Withholding Calculator most effectively, taxpayers should have a copy of the 2018 tax return due earlier this year, as well as recent paystubs for themselves and their spouses, if married and filing jointly.
The Withholding Calculator will recommend the number of allowances the employee should claim on their Form W-4. In some instances, it will recommend that the employee also have an additional flat-dollar amount withheld from each paycheck.
Though primarily designed for employees who receive wages, the Withholding Calculator can also be helpful to some recipients of pension and annuity income. If the Withholding Calculator suggests a change, the employee should fill out a new Form W-4 and give it to their employer as soon as possible. Similarly, recipients of pensions and annuities can make a change by filling out Form W-4P and giving it to their payer. They should not send these forms to the IRS.
Taxpayers should also check their withholding any time they have a major life change, such as getting married, getting divorced, having a baby, adopting a child, buying 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. Waiting means the remaining tax owed will need to be withheld from fewer paychecks so more will have to be taken from each one.