Did you get a large refund this past April? More than $1,000? Or perhaps you owed money and had to write a check you didn’t want to write? It may be time to sit down, sip your beverage, and learn a bit about how to adjust your tax withholdings especially in light of the new tax reform law changes that impact your taxes starting in 2018.
Withholdings are the taxes your employer takes from your pay each check, and it all starts with your payroll department. It’s not too tough once you understand, and it’s better that you control your money.
The first step to adjusting your withholdings is to go to the TurboTax W-4 withholding calculator to help you estimate your personal withholding allowances. All you need to do is enter info about you, your dependents, paycheck and any other income info. The TurboTax W-4 withholding calculator will also take into account home ownership, charitable donations and retirement contributions since those all can help your tax situation and can increase the amount of allowances you can take.
The TurboTax W-4 withholding calculator has also been updated to reflect provisions in the new tax reform law. Once you answer simple questions, you can estimate the number of withholding allowances to claim on your W-4, whether you want more money in your paycheck or a bigger tax refund. When you are done, you can print a blank W-4 to fill out and give to your employer or payroll provider.
Here are a number of situations that would prompt you to want to review and possibly adjust your withholding:
Tax law changes as a result of the new tax reform law will impact the majority of taxpayers beginning with tax year 2018 (the taxes you file in 2019) since tax rates were lowered by one to three percent for the majority of taxpayers. Additional tax law changes, like increased standard deduction, child tax credit, and the elimination of personal and dependent exemptions, may also impact your filing scenario.
The new IRS withholding tables are designed to produce the correct amount of tax withholding if you only claim the standard deduction and have a less involved tax return. However, due to changes not reflected in the updated withholding tables, such as changes to itemized deductions, increased child tax credit to $2,000, the new dependent credit, and the elimination of dependent and personal exemptions, you should file a new Form W-4 with your employer in response to the new tax law, if your personal situations changed, or if you started a new job.
When you experience life changes, it’s time to look at how your taxes are impacted. Marriage or divorce can change your tax situation and cause you to adjust your W-4. Although the addition of a dependent, by birth, adoption, or an elderly parent moving in and getting more than 50% of their support from you, will no longer qualify as an extra exemption under the new tax law, you may still receive other tax benefits that will give you a personal allowance when you have dependents.
The purchase of a new home will likely have the largest impact on your withholding. A $250,000 mortgage (at 4.5% 30yr fixed) will have just over $11,000 in tax-deductible interest the first full year. Add another $4,000 for property tax and this $15,000 could translate to additional allowances for itemized deductions on your W-4.
Having a side gig and a W-2 job may be a reason to lower your withholding allowance for your W-2 job so you can pay in more taxes to offset the taxes that are not withheld from your self-employment income.
Don’t worry about knowing these tax rules, TurboTax has you covered. TurboTax will ask you simple questions and give you the tax deductions and credits you are eligible for based on your answers. If you have questions at tax-time, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent to get your tax questions answered.