Annual Tax Withholding Allowance Checkup
Tax season is in full swing now and since the Tax Cuts and Jobs Act changed the tax rates, it is worth it to take a look at how many withholding allowances you are claiming. Review your tax withholdings especially if you have itemized in the past. Many itemized deductions have been suspended so your tax liability may have changed.
Fortunately, the IRS website has a calculator to estimate the optimal withholdings for most taxpayers. On the www.irs.gov site, find the IRS Withholding Calculator under W-4 and look under Other Items You May Find Useful. You’ll need to answer some basic information and pull wage income and withholding numbers off of a recent paycheck, so have a pay stub handy. You’ll also enter non-wage information so you may want to grab last year’s tax returns for estimates of those figures. The IRS Withholding Calculator will let you know the right number of withholding allowances to take. Lastly, be sure to file a W-4 with your employer to make any changes.
Remember that a withholding allowance is an exemption that reduces how much income tax an employer will deduct from your paycheck. The more allowances you claim, the less income tax will be deducted, and you could pay tax at the end of the year. The fewer allowances you claim, the more tax will be withheld and you could get a refund when you file your taxes. If you claim zero withholdings, the maximum amount of taxes will be withheld.
The best plan is to have the amount of tax due be equal to the amount of tax withheld. You can also specify an additional dollar withholding amount on the W-4 per paycheck to get you closer to paying only the amount of tax you owe and avoid either large amounts of tax due at the end of the year or large refunds. If you’ve always gotten a refund you may want to consider increasing the number of allowances. Next year’s refund won’t be as large, but since not as much tax is withheld, you’ll see more of your money in your paycheck every month!
