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You and Your Paycheck: To Have and To Withhold

August 31,2018 — In the wake of last year’s Tax Cuts and Jobs Act, you may not discover whether your 2018 tax bill ends up higher or lower until you or your accountant start plugging numbers into the IRS’s new filing forms sometime after year-end. But there is one task worth crossing off the to-do list today: Is your employer withholding an appropriate amount for your taxes owed?

American workers know they need to pay a certain amount of income tax throughout the year so they don’t owe too much, or anything, the following April 15th. But what this “certain amount” is can be tricky to calculate. On the Federal level, it’s the lower of 90% owed for the current tax year, or between 100–110% paid for the prior tax year.

Most taxpayers don’t think about it this way. Instead, they’ve figured out how much to have withheld from their paychecks to avoid either a large refund or amount due come April 15th.

But this isn’t a typical year for your income tax withholding. The Tax Cuts and Jobs Act (TCJA) enacted last December changed every taxpayer’s income tax calculation, effective last January 1. Most American workers can expect the TCJA to lower their 2018 tax bills, all things being equal. But the IRS also rewrote the payroll tax tables that employers are required to use when they calculate how much to withhold from employees’ paychecks. The challenge is to ensure that your new payroll withholding is still paying in that “certain” amount of necessary income tax throughout the year. If it isn’t, you may have an unpleasant surprise this April.

That’s kind of an unfortunate trick. Fortunately, the IRS has provided a calculator to help you perform a “paycheck checkup”: https://apps.irs.gov/app/withholdingcalculator/. I recommend using it; if the numbers fall short, talk with your employer about increasing your withholdings. Better yet if you have access to a CPA to assist. There are several reasons the new, standard withholding might not fit your needs – such as if you earn other taxable income outside of work.

Written by John A. Frisch, CPA/PFS, CFP, AIF, PPC

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