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Time to Double-Check Your Paycheck

The new tax law means you might need to adjust your withholding

Stacks of 100 dollar bills

GP Kidd/Getty Images

New tax laws may mean you need to reevaluate your W-4 tax form withholdings.

It’s time to look at your W-4.

The W-4 is the form you give your employer to determine how much is withheld from your paycheck to cover your federal tax liability.

Based on wages, marital status and the number of withholding allowances you claim, you may need to tweak your W-4 to ensure you don’t pay too much — or too little — in federal taxes, experts say. That’s especially true this year under the new tax code.

Most workers, including older Americans, are likely to see larger paychecks due to lower individual tax rates and new income brackets. The Internal Revenue Service and tax experts say workers should review their pay stubs for changes under the 2018 IRS income tax withholding tables employers are required to use by Feb. 15.

The IRS is planning to release a new withholding calculator by the end of February to provide taxpayers additional guidance. The agency also reminds taxpayers that it is their responsibility — not their employers’ — to make sure they are contributing the appropriate amount in taxes.

“It’s a good idea to look at the W-4 at the beginning of every year because of the changes people have in their lives,’’ says IRS spokesman Eric Smith. “But with the tax code changes, there’s all the more reason to look early this year.”

The IRS says the withholding tables the agency recently released are designed to prevent most taxpayers from over- or under-withholding and reflect new higher standard deductions and the repeal of personal exemptions. Those with simple returns, such as a single source of income and few deductions, may not need to adjust their W-4 allowances, the IRS says.

But the new tables do not reflect the tax law changes that cap some deductions, increase the child tax credit, create a dependent credit, and repeal the dependent exemptions. Heavy itemizers and those with more complex tax situations who face higher tax bills may want to alter their W-4 allowances as soon as possible to avoid a large year-end tax bill. Experts also say you should consider whether:

  • You already overpay. Ideally, the withholding allowances you claim on your W-4 should result in your paying about what you owe in taxes. But most taxpayers have too much federal tax withheld from their paychecks. Last year, the IRS sent refunds to nearly 112 million filers. The average amount: around $2,900.
  • You’re changing jobs. If you or your spouse loses a job or gets a higher-paying job, it could put you both in a different tax bracket.
  • You have high state taxes. Taxpayers in high-tax states no longer enjoy unlimited federal deductions of property taxes and state and local taxes. Previously, many of their W-4 allowances reflected those tax breaks. Beginning this year, those deductions are capped at a combined $10,000. Take fewer allowances and have more taxes withheld to avoid a higher tax bill at the end of the year, experts say.
  • You have a home equity loan. Homeowners could deduct interest on up to $100,000 in home equity loans under the previous tax code. That deduction has been eliminated. The interest is still deductible, however, if you use the loan to buy, build or substantially improve your main home or second home.
  • You’re losing personal exemptions. Under prior tax law, filers could deduct $4,050 for themselves and each dependent. Single filers and married couples filing jointly will be able to claim higher standard deductions, but those with a large number of dependents may not have as many deductions, and a higher child tax credit ($2,000 vs. $1,000 in 2017) may not always offset the loss of personal exemptions, experts say.
  • You have extra income. Income from freelance work and side gigs might not be reported or taxed when you receive the money, but you still will owe taxes on those earnings. Anticipate what outside income you may have this year and have more federal tax withheld from your day job.
  • Your marital status is changing. If you get married at any time during the year, the IRS considers you married the entire year. Likewise, if you get divorced, tax-wise, you’re considered divorced for the full year. “You may want to adjust your W-4 to factor in your spouse’s income, deductions, and credits or lack of,’’ says Eric Bronnenkant, an accountant, certified financial planner and head of tax at investment firm Betterment. “And if you’re getting divorced, you might want to adjust your W-4 to ignore all of your ex-spouse's income, deductions and tax credits.”
  • You have a baby or adopt a child. You might qualify for a tax benefit that allows you to reduce your withholding.
  • You expect capital gains, large dividend payments or interest payments. The income is not subject to immediate withholding, so again, adjust accordingly, Bronnenkant says.

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