One thing we know about the most significant tax changes in decades: it will affect your tax return. While other tax code changes throughout the years may have tweaked obscure credits and rules, the tax reform signed into law in December 2017 made changes to personal exemptions and other provisions that affect everyone.
But that doesn’t necessarily mean your taxes are now harder to prepare or that you will pay more. In fact, you may pay considerably less. And that’s why it’s more important than ever this year to adjust your withholdings to have the right amount of tax withheld from your paycheck.
What does it mean to adjust my withholdings?
If you’re new to earning a paycheck, this talk of “adjusting withholdings” may seem confusing. Here’s how it works.
When you earn money as an employee, the Internal Revenue Service (IRS) takes taxes directly from your paycheck. The portion they take is called “withholding.” Over the year, that withheld tax builds up under your name to help pay off your tax bill.
The amount your employer withholds is affected by the information you provide on Form W-4. When you change your Form W-4, it adjusts the amount your employer withholds from your pay. Your employer does not have any discretion over how much they withhold. They must withhold the appropriate amount based on your income, the information on your Form W-4, and the IRS withholding tables.
Note: The tax withheld from your paychecks during the year could potentially not cover your total tax bill when you file your return. Your employer doesn’t know if you earned any extra income from outside sources, or your exact deductions, credits, and other financial information. They calculate your withholdings based on guidelines set by the IRS.
Can I adjust my Form W-4, so I don’t pay any taxes?
You can, but it’s typically not recommended. If you withhold zero taxes throughout the year, you’ll likely owe a very large tax bill come tax season. And it’ll probably include penalties and interest.
It’s better to try to have about the same amount withheld as you expect to owe in taxes.
My paycheck changed earlier this year. Do I still need to adjust my Form W-4?
The IRS supplied employers with new withholding tables early in 2018, which caused many people to have more or less tax withheld from their paychecks. Assuming you have no other major life changes, such as a new baby or a divorce, you may not need to file a new Form W-4 to adjust your income tax withholdings.
However, you may want to adjust your withholding if you expect to pay significantly more or less in taxes due to various provisions of tax reform.
The IRS does not require everyone to submit a new Form W-4 to their employer this year.
How is the 2018 Form W-4 different from the previous form?
The 2018 Form W-4 doesn’t look much different than the previous version. It still asks how many withholding allowances you want to claim along with your other personal information.
One thing to keep in mind as you complete the form, however, is that withholding allowances are not the same thing as personal exemptions. Therefore, while the personal exemption was eliminated for 2018, that is not only what determines the number of allowances you should claim.
How do allowances change my withholding?
The more allowances you claim on Form W-4, the less income tax you have withheld from your pay. Claiming fewer allowances, on the other hand, causes you to have more income tax withheld from each paycheck.
In other words, if you withhold too much, you may receive a larger refund come tax time. And in that case, you may want to consider claiming additional allowances to keep more of your money throughout the year. If you didn’t withhold enough income tax from your paycheck and owed money when you filed, you may want to claim fewer allowances to increase the amount of tax taken from your paycheck. The key to withholdings if finding the right balance for your financial situation.
Who should file a new Form W-4 to avoid having too much income tax withheld?
You may need to file a new Form W-4 if:
- Your state and local tax itemized deductions are affected by the new limit. Starting in 2018, you can only deduct $10,000 per tax return for property taxes, state sales and income taxes, and other state and local taxes.
- You typically claimed a large deduction for interest on home equity indebtedness. Unless your home equity loan meets certain criteria, you can no longer deduct the interest.
- You qualify for significant new or improved tax breaks, such as the expanded child tax credit.
- You may owe significantly more or less based on other tax reform changes.
As always, you should file a new Form W-4 if you experience major life changes in 2018. For instance, tying the knot, having a baby or buying a home can greatly impact your tax situation. You should adjust your withholdings accordingly.
Generally, you don’t need to file a new Form W-4 for changes that affect everyone, such as the tax brackets or the standard deduction. Those changes are built into the new withholding tables your employer started using earlier in the year.
How else can I adjust my withholding aside from the number of allowances?
If you are married, you can choose the “Married, but withhold at higher Single rate” box on Form W-4 to have more tax withheld.
You can also choose to have an additional dollar amount withheld from every paycheck, if necessary.
How do I create a new Form W-4?
Ask your employer’s human resource or payroll department for a new form. They should provide the form to you. Otherwise, many tax software companies, like TaxAct, will help you quickly complete the form. You can then download it straight from their platform.
After I complete Form W-4, how do I file it?
Once completed, give your new Form W-4 to your payroll or human resource department. Do not send it to the IRS.