The Tax Cuts and Jobs Act of 2017 cut taxes for many Americans and changed the tax bracket structure. Did you check your withholding and adjust to take any likely tax bill changes into account?
According to a study from tax preparer H&R Block, you probably didn't and there's a good chance you don't know when to change your withholding, or how to do it.
Only 19% of Americans recently polled by H&R Block said they changed their withholding. Who knows if that's an accurate number because 40% of respondents said they updated their W-2 form and 11% said they updated their 1099 form. Only employers fill out those forms. They are sent to employees and the IRS at the beginning of the year to summarize the previous year's income and all taxes withheld.
Respondents are probably confusing the W-2 form with the W-4 form for withholding. You fill out a W-4 form upon employment to tell your employer how much of your salary to hold out for taxes during the year. You change your W-4 whenever you have a status change that affects your taxes for the year for example, you get a raise.
Even if they got the form right, a surprising number of respondents didn't understand how withholding works.
A portion of your salary is withheld each pay period and submitted to the government to pay your estimated taxes for that pay period. (The government wants income spread out evenly over the year, just like you do.) If you increase the amount withheld, your monthly paycheck will be smaller, and the amount sent to the government will be larger.
Approximately 30% of survey respondents thought that by increasing withholding they would receive a larger paycheck and by decreasing withholding they would get a larger refund the exact opposite of the way withholding works.
Many respondents didn't know what to do with their completed W-4. Only 42% knew that W-4 forms must go to their employer (since your employer is the one that divides your income between paycheck and taxes). Over one-quarter (27%) of respondents thought that W-4s went to the IRS, while the rest came up with an interesting variety of destinations from the Social Security Administration to their bank to the Federal Reserve.
It's too late to do anything about your 2018 withholding, but now is a perfect time to learn from 2018's mistakes. Use the W-4 worksheet to check your withholding for 2019. The IRS also has an online withholding calculator that can walk you through the process.
See how the result compares to the previous year's withholding and adjust accordingly but remember that you're adjusting for the 2019 tax year.
Make the necessary changes now, so they will be in effect for the majority of the tax year. Give the revised form to your employer's HR department (not the IRS, FBI, CIA, or any other three-lettered organization). Review your check stubs to verify that the changes in withholding have been made.
You may be tempted to over-withhold to get a big refund, but why? All you'll do is let the government hold on to more of your money throughout the year. You could put that money to better use each month.
If you aren't sure what to do, your employer may be able to help you understand how W-4s work but you can always seek the advice of a qualified tax professional. Understand your withholding and make any necessary adjustments to avoid a nasty surprise in April 2020.
Failing to pay your taxes or a penalty you owe could negatively impact your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
Originally Posted at: https://www.moneytips.com/fewer-than-1-in-5-updated-their-withholding/360
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