Tax season is officially upon us, and for some of you, there may be some sticker shock when you file your 2019 tax return. Yes, the tax act went into effect in 2018 and for many, it meant that they owed money or received smaller refunds when they filed their 2018 tax return. The good news is you know that your employer under-withheld your taxes, but the bad news is without adjusting your W-4, they most likely did it again for 2019. But had you made some adjustments to your W-4, you should be okay in regards to 2019 when you file.
The Old Withholdings
When they enacted the tax changes in 2018, they did so by adjusting the withholding tables in February or March of 2018. This meant that for most of us, our employer was under-withholding our tax liability paid into the IRS from each paycheck. This underpayment to the IRS from your paycheck led to a larger check for you during the year but it most likely also lead to you owing the IRS in April of 2019. Yes, for the majority of people, they did see slight tax decreases when they filed but in the same token, they also received smaller refunds due to the withholding issues.
The bad news for your 2019 taxes is that unless you actually filed out a new W-4 after the tax bill went into effect in 2018, your employer did not change your withholdings. That means for the entire year, you had your taxes under-withheld again but this time it was for the full year meaning unlike 2018 where the new withholdings were calculated for nine to ten months. This slight difference could mean that this year your tax refund maybe even smaller, or you could end up owing the IRS when it comes time to file. For many, this will not be welcome news, but it is the reality of the situation considering the IRS withholding tables were not corrected in 2018 or 2019.
A New W-4 for 2020
The good news is that according to the IRS and numerous articles I have read on the subject of withholdings, the IRS has corrected its tax tables, and they are now more closely aligned to the tax law. Also, in 2020 the IRS has introduced a new W-4 that should be filled out if you want to adjust your withholdings. And unlike the previous W-4, this one has some easier aspects and some that are more difficult for people filling it out.
If you are married and both you and your spouse work, the form is considerably easier to fill out as you simply check a box if you have similar pay. If not, things can get somewhat difficult for filling out the form. It is not all that difficult, but I do recommend following the directions and having your previous tax return handy. But if you are not changing jobs from last year and you were satisfied with your withholdings, you do not need to take any action this year as the IRS will make the necessary adjustments for you.
But if you have taxable income that is significantly different, you may wish to fill out a new W-4 with your respective employers also, if you have a significant portion of your taxable income that is from self-employment or from other means that may not be taxed at the time you will want to consider filling out steps three and four in the new form. In these steps, you can tell your company and the IRS to withhold more from your paycheck to offset the income from outside sources. This is why it is a good idea to have a copy of your previous tax return when filling out the new form. And no, you will not have to take your previous return to a new employer as they will now generally provide you a few days to fill out the form instead of requesting it the first day on the job.
Conclusion
There are some major differences in the tax law, the tax tables, and now with the federal withholdings that you should be aware of. In the event you are not certain as to how to calculate your tax liability early in the year, I suggest you contact a tax specialist or a Registered Financial Consultant for assistance. Regardless, I am not 100% certain I am going to rely even on the new W-4 form and instructions to ensure that my employer and the IRS withhold enough in taxes to ensure I do not owe money this time next year. Be prepared and be proactive when it comes to your taxes and consult a knowledgeable, professional today.
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