Theo Thimou, Clark.com
While you’ve been wrapped up in your 2017 tax return, the IRS has been busy crunching the numbers to find out how the new tax law will impact withholding.
We all know some drastic changes have been made to our nation’s tax code. You’re probably already seeing more money in your paycheck as a result.
But if you’re not careful, it’s easy to have your employer withhold too much money — money that you won’t see until your file your 2018 tax return in 2019!
IRS withholding calculator has been updated
On February 28, the IRS rolled out the latest version of its withholding calculator, updated to reflect the new withholding tables.
With this free tool, you can ensure you don’t have too much money held out of each check this year going forward.
And if you’re concerned about privacy, don’t worry. You won’t have to input your name, Social Security number, address or bank account numbers.
You’ll only need two things to get started:
- Your most recent pay stubs
- Your most recent income tax return
Last year’s completed tax return will help you estimate your 2018 income to expedite the calculation.
But remember, this calculator will only be as reliable as the info you provide. So if you have wild unexpected income swings later in the year, you’ll probably want to revisit the calculator again as 2018 goes on.
If you find you are having too much money held out of each paycheck, just fill out a new Form W-4and submit it to your employer.
It’s important to understand that this calculator won’t work for everybody, but it will work for most people.
If you’re self employed, have long-term capital gains or pay the alternative minimum tax or tax on the unearned income of dependents, your tax situation may be too complex for the calculator to estimate.
In your case, the IRS suggests waiting until Publication 505, Tax Withholding and Estimated Tax, is updated in the early spring and referring to that info. Publication 505 should be able to give you a more accurate answer.
Why is watching your withholding so important?
A couple reasons, actually!
For starters, withholding too much money out of each paycheck means you’re going to get a big, fat tax refund check.
That might sound good to a lot of people, but here’s a reality check: The average refund is $2,800. That means you’ve made an almost $3,000 loan to the government and now they’re paying you back — minus any interest you could have earned on the money if you banked it away in a high-yield account.
So by lowering your withholding, you won’t get a big refund next year. But you can put that extra money to work all year long in your life right now.
Second, having a lot of money held out of every check in the anticipation of a big refund makes you a more attractive target to tax return identity thieves.
The thieves have been actively exploiting loopholes at companies to get access to bulk downloads of W-2 income forms so they can file as you and steal your fat refund.
Don’t let them do it!
RELATED: 3 simple money moves to make in 2018