Tax Tips: IRS online calculator offers a ‘paycheck checkup’
WASHINGTON — Millions of Americans are now getting bigger paychecks as a result of the new tax law. So the government is issuing an online calculator for figuring whether enough money is being set aside. The calculator unveiled last week by the Treasury Department and the Internal Revenue Service helps people determine whether they have the correct amount of money withheld by employers from paychecks to avoid facing a huge tax bill for 2018. The calculator asks taxpayers to estimate their 2018 income and other items that affect their taxes, such as filing status and number of dependents. The changes reflect the massive Republican tax plan signed into law in December. Experts advise checking the calculator to ensure people have the correct number of withholdings and updating W-4 forms filed with employers. At the same time, experts say, the new calculator doesn’t provide a fool-proof reckoning; it helps people estimate their tax obligation to determine the amount that should be withheld. The heftier paychecks for many showing up in recent weeks resulted from employers withholding less money in anticipation of lower income taxes under the law. The calculator was the governments latest burst of information related to the sweeping $1.5 trillion tax overhaul, the first major rewrite of the tax code in three decades, which took effect Jan. 1. The new law provides steep tax cuts for corporations and wealthy Americans while offering more modest reductions for most low- and middle-income families and individuals. The calculator is designed to add precision to the income-tax withholding tables issued last month to guide how much employers should set aside as taxes from workers pay. The tables reflected only some of the changes under the new tax law. With businesses across the country under a mandate to adopt the payroll withholding changes by Feb. 15, employees started seeing the changes reflected in their paychecks this month. According to the nonpartisan Tax Policy Center, a middle-income household would on average get a tax cut of $930 this year, lifting its after-tax income by about 1.6 percent. That increase wont be perfectly reflected in paychecks, though, because lower tax withholding on pay is just a piece of a complicated set of changes from the new tax law. What your employer withholds is based on an estimate of your tax obligation that includes many complex factors, but its not a perfect measure. As a result, taxpayers may find they are unintentionally over- or under-withholding for their taxes if they don’t do some legwork. Employees should also use the calculator every year in order to ensure they continue to have the appropriate withholding, Treasury Secretary Steven Mnuchin said in a statement. This paycheck checkup is more important than ever and will allow employees to see the tax cuts properly reflected in their withholding. The calculator can be accessed at https://apps.irs.gov/app/withholdingcalculator.
Here are some plan-ahead instructions for using it: Gather your most recent pay stub from work. Check to make sure it reflects the amount of Federal income tax that you have had withheld so far in 2018. Have a completed copy of your 2017 (or possibly 2016) tax return handy. Information on that return can help you estimate income and other items for 2018. However, note that the new tax law made significant changes to itemized deductions. Keep in mind that the withholding calculator results are only as accurate as the information entered. If your circumstances change during the year, come back to the calculator to make sure your withholding is still correct. The withholding calculator does not request personally-identifiable information such as name, Social Security number, address or bank account numbers. The IRS does not save or record the information entered on the calculator. As always, watch out for tax scams, especially via email or phone calls and be especially alert to cybercriminals impersonating the IRS. The IRS does not send emails related to the calculator or the information entered. Use the results from the withholding calculator to determine if you should complete a new Form W-4 and, if so, what information to put on a new Form W-4. There is no need to complete the worksheets that accompany Form W-4 if the calculator is used. As a general rule, the fewer withholding allowances you enter on the Form W-4 the higher your tax withholding will be. Entering 0 or 1 on line 5 of the W-4 means more tax will be withheld. Entering a bigger number means less tax with- holding, resulting in a smaller tax refund or potentially a tax bill or penalty. If you complete a new Form W-4, you should submit it to your employer as soon as possible. With withholding occurring throughout the year, it’s better to take this step early on.