The IRS recommends that taxpayers who itemize should do some planning now to avoid the sticker shock of a large tax bill for 2018.
They're urged to use the Withholding Calculator on the IRS website to perform a "paycheck checkup" now. This free tool will ask you to enter estimated values for your income in 2018, the number of children you would claim, an estimate of your itemized deductions and the amount of federal tax withheld on your last paycheck. It only takes a few minutes — all you'll need is your most recent pay statement. But having your 2017 tax return handy can help to speed up the process.
It's important to note that the calculator won't allow you to enter an amount that exceeds $10,000 as a deduction for state and local taxes you paid this year to reflect the new limit on them.
If your results indicate you'll owe tax when you file, you can do several things now to limit the damage.
You can save money toward your tax bill each month, for instance, in a money market fund, which now pay around 2 percent in interest.
You can increase the amount of tax withheld from your pay for the rest of this year by revising your W-4 form. As a rule, when you reduce the number of allowances you claim, your employer will withhold more federal income tax.
Also review how much of your income isn't subject to tax withholding. This could be income from interest, dividends and capital gains. It could also be income you've earned from services such as Airbnb, Uber or Lyft. The more of this kind of income you have, the more you'll need to reduce the allowances you claim on the W-4 or the more you'll need to save to pay your coming tax bill.
It's important to know what your tax situation is now because having too little money withheld could result in an unexpected tax bill or even a penalty when you file your 2018 return. By doing this checkup now, you'll still have time to make any necessary adjustments.
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