The April 15 tax deadline came and went this week. You likely already have received a refund or cut a check to the U.S. Treasury, but your work isn't done. If you haven't already, now would be a good time to look at how much your employer is withholding from your paycheck for federal taxes. The financial check-up will cut down on the potential for an unwelcome surprise next year when you file your income tax return for 2019.
Thanks to the Tax Cuts and Jobs Act, about 65 percent of individual taxpayers paid less in taxes for 2018, according to the Tax Policy Center. Only about 6 percent paid more, and the rest more or less broke even. But many people don't feel any better off. Only 40 percent of taxpayers think they got a tax cut, according to a recent New York Times survey. Other surveys found that a large minority of people think their taxes rose.
Why the disconnect? In part, many taxpayers mistakenly associate lower taxes with a bigger refund, but the two things don't always go together. The tax cut showed up in larger paychecks. In other words, workers already had received the extra money when tax filing season rolled around.
That sparked a lot of confusion. Many workers had not noticed the increase in their paychecks or attributed it to something else, like a bonus from their employer or a pay raise. They expected the tax cuts would result in a bigger refund than the prior year. Others got socked with a tax bill.
Politics also played a role. Liberal opponents of what is often referred to as President Donald Trump's tax overhaul cast it as an increase for most middle-class taxpayers, an erroneous notion that nevertheless gained traction. And it didn't help that the overhaul wasn't signed until Dec. 22, 2017. The Internal Revenue Service had to scramble to release guidance on how the changes would affect taxpayers.
In fact, the new tax tables were only in effect for about nine months last year. This year they will cover all 12 months. Why does that matter? If you got hit with a tax bill or a less-than-satisfying refund, it could be worse when you file your tax return next year, unless you tweak your withholding amounts.
The IRS has an online calculator that helps estimate how much to withhold from each paycheck. Intuit, which operates TurboTax, and H&R Block have similar calculators. You will need a recent pay stub (including one for your spouse) and last year's tax return. Once you know how much to set aside for taxes, you can amend your W-4 form, also known as the Employee's Withholding Allowance Certificate, with your employer.
One caveat: The IRS is updating the W-4 to align it with the new tax laws. The revised version should be out by the end of the year. But it's still worth checking your withholding amounts now. If you wait, you might not set aside enough, opening yourself up to an unpleasant financial hit next year.