You probably noticed your paycheck got a little bigger this past year. Thanks to the new tax law, many of us got a raise, basically a reduction in tax withholding.
That little extra take-home pay is great — for now. Unfortunately, that larger paycheck might mean you’ll be cutting the IRS a check come tax time in April. Due to changes implemented as part of the new tax law, your employer might not be withholding enough of your wages from each paycheck. If, indeed, you’re being under-withheld, you’ll be on the hook to pay the difference at tax time next year.
According to a new report from the Government Accountability Office, some 30 million people – 21 percent of all U.S. taxpayers – are in the same boat. According to the GAO’s report, the hypothetical taxpayer who will be paying in April is married with two children, earns $180,000 annually, $20,000 of which comes from non-wage income and itemizes deductions. If that’s you (or close to you), you might want to save a check for the IRS, or better yet, change your withholding now. If your taxes are simple, you may still get a refund.
The IRS encourages taxpayers to review their paychecks and their tax withholding anytime there are changes to tax law. You’ll also want to update it when you have a big life change like getting married, changing jobs or having a baby.
Having the right amount withheld ensures your money stays in the hands of its best manager: you. If your employer withholds too much money, you’ll get a refund but you’re basically giving Uncle Sam an interest free loan for a year — you could probably put that money to better use in the meantime. If your employer doesn’t withhold enough, you’ll get a bigger paycheck, but you’ll owe money at tax time. Getting your withholding just right ensures you’re giving Uncle Sam exactly what he needs from each check.
To update your withholding, you simply submit a new Form W-4 to your employer before Dec. 1. And if you’re unsure whether the tax law changes will affect you, the IRS created a withholding calculator so you can figure out what you’ll owe.