The White House announced yesterday that tax refunds would be processed even though the government is still shut down. Which reminded me that now is a great time to revisit your W-4. Why? Because t’s very, very likely that the W-4 form on file with your employer is off. Last year, the Treasury Department and the IRS released updated withholding tables (below) to reflect the new Tax Cuts and Jobs Act. The legislation resulted in lower individual income tax rates, a doubled standard deduction and the elimination of personal exemptions.
As we know, taxes can be somewhat finicky: if not enough is withheld, you’ll owe money come tax time. Pay too much, and you end up with a large refund. On top that, while earning a bigger paycheck twice a month sounds awesome, it could come back to hurt you come April. With all this being said, we obviously want to be as close to zero as possible. But how do we accomplish this in a changing tax environment?
Prior to 2019, it was common to withhold less from your pay if you had deductions that were itemized. However, that may no longer hold true considering the fact that the standard deduction is nearly twice what it previously was. Due of these new tax laws, a high percentage of households who itemized in previous years will no longer be able to do so (another reason to check up your withholding). Previous laws also allowed income earners to withhold less in taxes if you they had dependents. Going forward, these types of exemptions are gone, so those filers should review their pay stub to ensure that they’re not under-withheld.
Another reason to make sure your refund isn’t “too big” is because you will, more or less, be giving the government an interest-free loan. With cash accounts now paying above 2%, that money is better off working for you in your own account. This would allow you to pay off debt, add to your savings, or a multitude of things that are better than simply giving it to the US government for a year, which we have covered before.
If you are retired, one option is to use your Form W-4V to withhold a flat rate from your Social Security earnings. Further, use your Form W-4P to withhold from your pension. Additionally, there are new limits on deductions for state and local taxes and home mortgage interest, a big item for many in the DC Metro and other locales.
If you’re feeling confused about the upcoming tax season (which is almost upon us), please feel free to reach out to us. We have worked with many CPAs in the DC Metro area and would love to further assist you in finding the best fit for your tax questions.