by Stephen Reed | Accounting News, News, Tax, Tax Consulting, Tax Planning
The majority of American taxpayers typically receive a refund from their federal tax returns, and in 2019 those refunds could increase by 26 percent, which is higher than previous years.
The jump in expected refunds is most likely a result of the recent tax overhaul that cut personal income tax rates so that workers can keep more of their income. Theoretically, such a change in taxes should prompt American workers to adjust their withholding rates accordingly through a Form W-4 with their employer. However, research shows that roughly 75 percent of tax payers, who historically over withhold from their paychecks anyway, only partially adjust those rates when new tax laws are introduced, or they don’t adjust them at all. This means that even more taxes are withheld from their paychecks than necessary, which results in a heftier refund.
The prospect of a bigger tax refund is enticing, and tax refunds are typically used to boost savings, pay down debt, and pay for vacations. But for those Americans who fall within the 75 percent of workers living paycheck to paycheck with little to no money in savings, over withholding is probably not the best move.
If Americans withhold more than necessary from their paychecks, they have less funds to apply to everyday expenses, financial goals, and life emergencies that pop up. If you are someone who might be over withholding and could benefit from an increase in your paycheck rather than waiting to see that money in your tax refund, see about submitting a new Form W-4 with your employer.
by Jean Miller | Accounting News, News, Resources, Tax, Tax Planning - Individual, Tax Preparation - Individual
Beginning in 2018, the new tax laws are officially implemented, which could spell a shift in take home pay for many workers. And, if your employer has begun using the new withholding tables, you could see a change in pay this month. The Congressional Budget Office has approximated that employers could withhold around $10-15 billion less from employees each month by utilizing the new withholding tables.
Many taxpayers may be wondering if they will actually see any of that $10-$15 billion on their regular paychecks? An increase in take-home pay will be based on the number of allowances you take, how often you are paid and if you file jointly or are a single filer. So, for the average single filer who makes between $46,000-$162,000 and is paid bi-weekly, your paycheck will likely increase between $40 and $190. For married filers who make between $61,000-$167,000, you could see a bi-weekly pay increase between $30 and $172.
However, there are other factors in play that could offset any pay increases taxpayers might see. While the federal tax cuts might increase take-home pay for the average workers, other changes in deductions might counteract a boost in pay. Although the federal tax rates changed, some state or local taxes may have increased for some workers. Many companies make health benefits or other benefit changes at the start of a new year as well, which would ultimately influence a worker’s final take-home amount.
Whether you see a pay increase or not, all employees should consider re-evaluating their withholding allowances. Why? Withholding tables are intended to provide a ballpark figure of how much tax should be taken from your pay, but this year’s estimation could be a bit looser than previous years.
The new tax laws change elements that affect how many allowances workers claim. For example, some personal exemptions have been eliminated, itemized deductions have been reduced and tax credits have been altered. The new withholding tables do incorporate the tax code changes, but taxpayers were not required to fill out a new W-4 form. Therefore, the number of allowances selected when your last W-4 was filed could be rather inaccurate now.
How do you know if your allowances need to be modified? Taxpayers can speak with a tax adviser to decide the correct withholding amounts. Another option is to use the new withholding calculator the IRS plans to release at the end of February, which is designed to help employees calculate if they are claiming too little or too much in light of the tax changes. If you do decide to change withholding amounts, you will need to submit new instructions to your employer.
by Daniel Kittell | Accounting News, IRS, News, Tax, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual
With the passage of the new tax legislation last month, the IRS must take several steps to update withholding accuracy in accordance with the new laws. Their first major step consisted of updating the withholding tables for employers to follow, and those updates were posted on the IRS website January 11.
The IRS would like employers to begin using the new rates listed on the new tables as soon as possible and to continue using the 2017 tables until they have done so. However, employers must implement the new tables by February 15, 2018, at the latest. As soon as employers make those updates, employees will begin to see their paychecks reflect those changes, which could result in an increase in net pay for many taxpayers. The new tables are also designed to function with the current W-4 withholding forms, which should allow for a simpler transition for both employees and employers.
The new withholding tables are intended to reflect changes in rates and brackets, the repeal of some personal exemptions and the increase in the standard deduction enacted by the new tax laws. Additionally, the tables are meant to generate the correct withholding amounts for those with simple tax situations, as well as avoiding under or over-withholding taxes when possible.
Other items the IRS plans to update or revise include the withholding calculator on their website and the Form W-4. Many taxpayers use the IRS calculator to determine their own withholding, and the IRS expects the new calculator to be ready for public release by the end of February. Although the new Form W-4 may take a bit more time to revise, it should reflect changes in itemized deductions and increases or repeals of some credits. Employers are encouraged to continue using the 2017 Form W-4 until the new form is released.
For those beginning new jobs in 2018, for workers who have had personal life changes or for those who would simply like to update their withholding in light of the new laws, the revised calculator and Form W-4 can be used to make any withholding updates once they are released. Although the IRS is planning to educate taxpayers about the new withholding standards, workers are encouraged to find out more information regarding the changes on the IRS Withholding FAQ page.
