Over the last few years, the tax law has changed dramatically. This year, the W4 that is used to calculate paycheck withholdings has also been overhauled (for more on that, check out this article.) Both of these changes make it more necessary that ever to take a second look at what taxes are being withheld from the paycheck. Everyone should double check withholdings, but the following circumstances make it even more necessary:
- Parents who claim the Child Tax Credit.
- Taxpayers who usually itemized deductions before the new tax reform went into effect.
- Those who received a large refund or paid a large tax bill before the Tax Cuts and Jobs Act (TCJA).
- Two-income families.
- Workers who held two or more jobs during the year.
- Families with both paychecks and self-employed income.
Complicated Situations
Here are some more details for those who may be at high risk for tax adjustments:
Two-income families and people with multiple jobs may be more vulnerable to being under- or over-withheld following the tax law changes. Do a paycheck checkup to determine whether the correct amount of tax is withheld. The new W4 allows for a more detailed analysis of multi-income households. So it is easier than ever to get this part right.
If you have children and claim the Child Tax Credit, you could find that your tax refund is significantly larger since the new TCJA. If in the past you found that your income was too high to receive any benefits from the Child Tax Credit, you may now qualify. However, if you’re earning more money, you may have hit phase-out limits. Either way, you may need to adjust withholding so you don’t have a big bill, or excessive refund, when you file.
If you itemized deductions, you may find that you’re not paying enough tax through withholding because the TCJA limits some popular tax deductions you used to claim. Having too little tax withheld could result in an unexpected tax bill or even a tax penalty when you file your next return. During the paycheck checkup, you’ll adjust your tax withholding to spread out the additional amount you’ll owe over the remaining paychecks this year.
In fact, many people who itemized in the past may not need to anymore, radically changing their tax situation.
If you’re self-employed and pay quarterly estimated tax payments, you may need to raise or lower the amount of tax you pay each quarter.
Any life change — getting married or divorced, buying a home, or having a baby — should make you consider doing a paycheck checkup. With the release of the new W4 form, now may be the perfect time to make sure you are having the correct amount withheld.
