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IRS to taxpayers: Check your tax withholding now

Drowning in paper after tax season? How to sort it out
  • If you wound up paying additional tax for 2018, the IRS has some advice.
  • The agency recommends that you review your paycheck's tax withholding as soon as possible.
  • Chances are the new tax law did cut your tax liability, but your withholding dropped even more.

April 15 is thankfully well behind us, but the IRS has some advice for taxpayers now. It's time to take another look at your tax withholding, do a paycheck checkup and make adjustments to avoid a repeat of the frustration and unpleasant surprises many experienced this year.

The agency reported that while the average refund issued for tax year 2018 was $2,729 (just a bit lower than it was in 2017), many Americans got refunds that were smaller than they expected, and many others found they owed additional tax when they filed their 2018 returns.

This was the cause of a lot of confusion and even anger. Many people expressed their frustration at #GOPTaxScam and #GOPTaxScamStories. After all, the new tax law passed in 2017 was supposed to give most working Americans a tax cut, right?

This tax season, I saw this firsthand as I listened to clients who had similar complaints. But after taking a closer look at each individual's situation, I found that their frustration was misguided. Here's a typical example.

"I always get a refund"

A client sent me an email expressing her frustration that her tax preparer informed her that she needed to pay additional federal income tax of over $6,000. "How could this be, I always get a tax refund?" she complained. She directed her frustration at President Trump, saying his new tax law was making her pay more while benefiting the wealthy.

This individual is a newly single mom with three children, and her filing status for 2018 was married filing separately (she's awaiting a final divorce). I asked for copies of her 2017 and 2018 tax returns so I could get to the bottom of what happened. Here's a summary of what I found:

Item

2017 tax return

2018 tax return

Adjusted gross income

$238,500

$238,500

Total federal tax liability

$55,562

$49,826

Federal tax paid or withheld

$57,584

$43,425

Refund/(amount owed)

$2,022 refund

($6,401) amount owed

Effective tax rate

23.3%

20.9%

As you can see, although her income was the same for both years, her total federal tax liability in 2018 was $5,736 less than it was in 2017. Her lower federal tax for 2018 resulted from the changes in the new tax law because more of her income was taxed at lower tax rates and the alternative minimum tax was eliminated.

I also explained to her that she had to pay additional tax for 2018 because the total tax withheld from her pay in 2018 was $14,159 less than in 2017. If she had the same amount withheld in 2018 as in 2017, she would have received a 2018 tax refund of approximately $7,758, or about $5,700 more than she got in 2017.

Less tax withheld, more tax owed

Her employer is the reason she underpaid her taxes in 2018. It reduced the amount it withheld from each paycheck early last year. She remembered that last winter her take-home pay suddenly went up, but she didn't want to ask any questions. She simply enjoyed the extra money in her bank account.

The lesson from all this: Take the advice of the IRS and use its Withholding Calculator to make sure your your tax withholding is right. This calculator will recommend the number of allowances to claim on your  W-4 form, and in some cases it may also suggest an additional dollar amount to withhold from each paycheck. Make sure to give your new W-4 to your employer as soon as possible. Also, put a reminder in your calendar to do this again in January of 2020.

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