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If you itemize, do a paycheck checkup to avoid tax surprises

Posted on June 17, 2018

According to the most recent IRS data (2016), more than 30 percent of U.S. taxpayers – that’s 44 million of us — chose to itemize deductions. That compares to 68.5 percent of households — 101 million returns — who take the standard deduction.

If you are one of the 44 million who prefer to itemize deductions using Schedule A of Form 1040, the CPAs at Teipen Selanders Poynter & Ayres encourage you to use the newly updated IRS Withholding Calculator — soon — to see if you are withholding the right amount of tax for your income bracket.

Why? People who usually itemize deductions may not realize the extent of the changes enacted by The Tax Cut and Jobs Act. The IRS Withholding Calculator is easy to use and helps you make sure your employers are withholding the appropriate amount of tax from your paychecks for your particular financial situation.

The Tax Cut and Jobs Act nearly doubled standard deductions and changed several itemized deductions. These changes are effective as of January 2018 and will affect the tax returns taxpayers file in 2019.

Here’s what’s changed:

  • New limited deductions for state and local taxes
  • Limited home mortgage deduction interest in certain cases (see IR-2018-32 for details)
  • New excluded deductions for employee business expenses, tax preparation fees and investment expenses (including investment management fees, safe deposit box fees and investment expenses from pass-through entities)

So, individuals who formerly itemized may now find it more beneficial to take the standard deduction. If so, this could affect how much a taxpayer needs to have their employer withhold from their pay. Even if a taxpayer plans to continue itemizing, it makes sense to check his/her withholding because of the many other ramifications of the new tax law.

Adjusting withholding after a “paycheck checkup” can also prevent employees from having too much tax withheld. With the average refund topping $2,800, some taxpayers might prefer to have less tax withheld up front and receive more in their paychecks.

The Withholding Calculator is safe and user-friendly

It’s helpful to have a completed 2017 tax return nearby when using the Withholding Calculator. The return can help estimate the amount of income, deductions, adjustments and credits to enter. You will also need a recent pay stub. The results you get will be estimates, depending on the accuracy of the information entered.

Note that the Withholding Calculator does not request personally-identifiable information, such as name, Social Security number, address or bank account numbers. This is to protect you. The IRS does not save or record any information entered.

What if you need to make withholding changes?

Making changes is as easy as completing a new Form W-4 through your employer.

As a general rule, the fewer withholding allowances you enter on Form W-4, the higher your tax withholding will be. Entering “0” or “1” on line 5 for example, means more tax will be withheld. Entering a bigger number means less tax withholding, resulting in a smaller tax refund (or potentially a tax bill or penalty.)

The Teipen CPA team urges all taxpayers to do a “paycheck checkup” as early as possible so that if a withholding adjustment is necessary, there will be time for changes to take place evenly throughout the year. Waiting until the end of the year means there are fewer pay periods to make the tax changes – which could have a bigger impact on each paycheck.