How To Adjust Tax Withholding In Light of The New Tax Law

Adjust Tax Withholidng

Last week Gurian CPA was mentioned in an article in HuffPost, “How To Update Your Tax Withholding And Avoid A Surprise Tax Bill Next Year”. The information provided will help you understand how to adjust your tax withholding in light of the new tax law. Now that you’ve received your first tax return after the Tax Cuts and Job Act that went into effect in 2018, you can get a better idea of where you can make adjustments to your W-4 to avoid another surprise tax bill in 2020.

Adjusting your tax withholding

With the drastic change in the tax law many people found that their tax bills for 2019 were lower than previous years. Although, there were some that lost key deductions and exemptions which caused their 2019 tax bill to be higher than previous years. Regardless whether you were one that received a rather higher or lower tax bill for 2019, getting your tax withholding right is extremely important. Those that had a lower tax bill than previous years still need to adjust their withholding because that means that you were having too much money taken out of your check through the year. That could have been money left in your pocket to help you live more comfortably, rather than giving the government a tax-free loan. If you were one that found yourself with an unexpectedly high tax bill for 2019 then it is even more important to adjust your tax withholding to avoid interest and penalties. Below are some tips on how to adjust your tax withholding in light of the new tax law.

1. Understand your W-4

Your withholding are determined by the information you input on your Employee’s Withholding Allowance Certificate (W-4). There are two key number that you need to fill our on your W-4; the number of allowances and any additional tax you’d like to have withheld from your paycheck. Whether you are married or not should also be taken into consideration while determining your withholding. You might think that you’ve filled your form out correctly, but then you get your tax bill and it’s nothing close to what you estimated it to be at the end of the year. That’s because there are several worksheets that need to be filled out in order to come up with the correct figure. There forms include:

  • The personal allowances worksheet
  • A worksheet for itemized deductions, claiming adjustments to income or if you have additional income from non-work sources
  • A worksheet if you are married and both you and your spouse work, or if you have multiple jobs.

2. IRS Calculator

There is not a one answer fits all when it comes to how you should fill out your W-4 since everyone’s situation is different. The IRS understand that going through all this information to come up the correct withholding for your situation can be difficult for the average person, which is why they have a withholding calculator available. The withholding calculator will do most of the work for you, but you will still need to put in key information from your W-4 to get an accurate figure on the number of allowances you should take.

3. Estimation

Another approach to lowering or increasing your tax bill for next year is to make an estimate to get closer to where your tax bill should be. First you should understand that that one withholding allowance corresponds to $4,200 in annualized income. So, if you claim an extra allowance on your W-4 the IRS will see that as you made $4,200 less throughout the year, and vise versa if you cut an extra allowance. Here is the formula that you can use to make your estimate:

  • Figure out your marginal tax bracket – the rate at which your highest earnings got taxed.
  • Multiply the tax rate by $4,200 to get the approximate tax value of each allowance.
  • Divide your refund or tax bill by that calculated tax value.

If you got a refund, increase your withholding allowances by the result. If you owed tax, decrease your allowances accordingly. This isn’t a perfect solution, but if you’re wanting to try your tax planning on your own this is a viable option. With the adjustments to your withholding, you should see your paychecks get smaller or larger, and in return this will affect your tax bill at the end of the year. The goal is always to get your tax bill as close to zero as you can get.

4. Consult with a tax pro

When it comes to taxes, most individuals aren’t pros. Consulting with a tax pro can ensure that you are withholding the correct amount so that your tax bill is as close to zero as you can get. If you currently have a professional that files your taxes, they will usually provide this service free of charge.

You might think that since we’re already five months into the current tax year that it might be too late, but it’s always advised to take a look at your withholding and tax bill for the current year to see where there’s room for improvement. By following any of the tips on updating your w-4 can ensure that you’re not hit with an unexpected tax bill for next tax season. Being prepared now can make sure that you’re not hit with a large tax bill, which could lead to large penalties and fines.

By: Paige Knight

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