According to a recent survey, over 80% of Americans never updated their W-4 after the 2018 TJCA, which made sweeping changes to the tax rates. Those that never changed their withholdings may now be in a position of currently owing the IRS additional amounts, plus possible interest and penalties.
In order to ensure that you don’t get hit with any IRS penalties in the future, it’s important to revisit your W-4 withholdings annually. The information you file on your W-4 determines how much money you’ll owe, or get back, when you’re filing your taxes. If you withhold too little, you may owe the IRS come tax time. However, if you withhold too much, you could end up with a large refund, which means you’ve essentially given an interest-free loan to the government.
Start by using the IRS withholding calculator to determine the right amount for you to withhold. If your situation is complicated, or if you’re confused, you may also want to consult with an accountant. In addition, you should also revisit the W-4 if you’ve had a major life changing event, such as having a child, getting married or divorced, or if your spouse dies. Next, review what your current withholding is. If the numbers don’t match up, you’ll want to adjust your W-4, which you can do at any point during the year.
As you revisit your W-4, it’s also important to keep in mind that the 2020 projected tax rate schedules.
The key to paying the right amount of tax is to update your W-4 regularly. You should revisit your W-4 whenever you have a major personal life change. As we have written in the past, the potential for both a tax bill and a tax refund should be zero, or close to it. However, if you count on a big tax refund every year, pay attention to your withholding because it directly impacts your refund. You can adjust your W-4 at any time throughout the year, but if you do it later in the year, there will be less impact on your taxes for that year.
If you need any assistance with your taxes or updating your W-4, you should speak to a professional. We are happy to provide you with CPA recommendations if you would like. As always, please reach out to us with any questions or comments you might have.