It's no secret that 2018 will be an interesting year for individuals and their taxes. Near the end of 2017 a new tax bill was passed changing many key aspects of the tax code. A big question that many of our clients ask is "Am I withholding enough for taxes out of my paycheck?" Although each situation is different, there are steps that you can take now to help ensure there are no surprises when you go to file your taxes in early 2019.
What do the studies say?
According to a report from the US Government Accountability Office they estimate that approximately 21% of taxpayers may have their taxes under withheld in 2018, up from 18% if the law had not changed.1 This means that more people may not be setting aside enough to pay their tax bill. Does this mean that you're paying more in taxes? Not necessarily. This just means that the amount that is being withheld automatically from your paycheck may not be enough to cover the tax due. While you may owe less in taxes overall, if you're withholding too little you may find an unwelcome surprise when you file your taxes next year.
How do I know if I might be withholding too little?
One way to do a basic projection of your withholding is to use a withholding calculator using your paycheck information. The IRS has a simple calculator that will ask you a few questions about your tax situation to determine whether you may owe taxes. You can access the calculator by clicking the link here. It is important to take into consideration any unexpected income that may change the results of the calculator. For instance, did you sell investments for a large gain this year, or did you receive a bonus? To get a more accurate estimate, have your tax preparer do a tax projection.
What can I do if I am under withheld?
If you find that you may owe taxes next April, there is still time to revise your withholding. Your employer determines how much to withhold for taxes from your paycheck when you fill out form W4. An easy way to increase the amount withheld is to notify your employer to decrease the number of allowances claimed. Another way is to specify a specific, additional dollar amount to be taken out of each paycheck for taxes.