By Jennifer Cryder, CPA, CFO and vice president - operations
Many of us recently have enjoyed a small increase in our take-home pay as a result of new federal income tax withholding rates published by the IRS as a result of the Tax Cuts and Jobs Act of 2017. While we each may enjoy the extra money in our take-home paycheck now, you may want to take a moment to consider the impact of these extra dollars come tax filing time next year.
The IRS recently published a tax withholding calculator to help individuals assess whether they are having enough money withheld under the new tax rates to cover estimated 2018 tax liabilities. The calculator, along with some helpful instructions, can be found here.
I was curious about my own tax situation, so spent a few minutes gathering the following information:
- A copy of the 2017 return I recently filed. You could use your 2016 return if you haven’t yet filed for 2017, but remember that you’re estimating 2018 amounts in the calculator. You’ll have to jump forward two years rather than one.
- A copy of my most recent paystub.
- A quick calculation of how much I expect to contribute into my 401(k) plan in the coming year by multiplying my contribution rate times my income.
With these items in hand, walking through the calculator was quick and easy. There were five screens of questions to be answered, most coming from my tax return. After providing the details of my personal tax situation, I was provided specific and detailed instructions to follow. In total, I would say the process took me about 15 minutes from start to finish.
In my situation, I discovered that I was on track to be under-withheld for 2018. The IRS suggested to me that I revise my withholdings on the 2018 Form W-4. I’ve set two reminders for myself: first, to check my paystub in a few weeks to be sure the withholding changes were processed correctly; second, to rerun the calculations after the withholding changes have been made to ensure that I’m on track to cover my projected 2018 tax liability with payroll withholdings.
Being a CPA, I advise that you consult your CPA tax preparer for more specific and customized guidance as it relates to your individual circumstances. This calculator from the IRS is basic and not well suited for anyone who has sources of income other than basic wages. Further, if there are any changes to your tax situation during the year, it may be a good idea to rerun the calculations to be sure you’re still on track.
For more on how to use the calculator, including a step-by-step guide, check out this blog from Chris Humes, CPA.