The Tax Cuts and Jobs Act of 2017 cut taxes for many Americans and modified the tax bracket structure. Did you remember to check your withholding and adjust for the changes?
According to a study from H&R Block, you probably didn't — and there's a good chance you don't know when or how to update your withholding either.
Only 19 percent of Americans surveys said they changed their withholding. But even that low figure might be inaccurately high, since 40 percent of respondents said they updated their W-2 form and 11 percent said they updated their 1099 form — only employers fill out those forms.
Respondents are probably confusing the W-2 form with the W-4 form for withholding. You fill out a W-4 form upon employment to tell your employer how much of your salary to hold out for taxes during the year. You change your W-4 whenever you have a status change that affects your taxes for the year. A raise, for example.
Even if they got the form right, a surprising number of respondents didn't understand how withholding works.
A portion of your salary is withheld each pay period and submitted to the government to pay your estimated taxes for that pay period. (The government wants income spread out evenly over the year, just like you do.) If you increase the amount withheld, your monthly paycheck will be smaller, and the amount sent to the government will be larger.
About 30 percent of respondents thought that by increasing withholding they would receive a larger paycheck and by decreasing withholding they would get a larger refund — the exact opposite of the way withholding works.
Many respondents didn't know what to do with their completed W-4. Only 42 percent knew that W-4 forms must go to their employer (since they are the ones that divides your income between paycheck and taxes). Just over a quarter of respondents thought that W-4s went to the IRS, while the rest came up with a variety of destinations ranging from the Social Security Administration to their bank.
It's too late to do anything about your 2018 withholding, but now is a perfect time to learn from 2018's mistakes. Use the W-4 worksheet to check your withholding for 2019. The IRS also has an online withholding calculator that can walk you through the process.
See how the result compares to the previous year's withholding and adjust accordingly. Remember that you're adjusting for the 2019 tax year.
You may be tempted to over-withhold to get a big refund, but few tax experts woudl advise this. All you'll be doing is let the government hold on to more of your money throughout the year. You could put that money to better use each month.
If you aren't sure what to do, your employer may be able to help you understand how W-4s work, and you can of course seek the advice of a qualified tax professional. Understand your withholding and make any necessary adjustments to avoid a nasty surprise in April 2020.
Related Links:
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The Vast Majority Of Financially Insecure Americans Are Using Their Tax Refunds To Pay Off Bills
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