3 Steps to Take Before Adjusting Your W-4 Withholding

Updated: Dec 1, 2019

In 2018, many employees were surprised to find a tax liability on their tax return. For most employees, this "surprise" could have prevented if they had been been informed on how to adjust their Form W-4, Employee's Withholding Allowance Certificate for changes made under the 2017 Tax Cuts and Jobs Act (TCJA).

Among many other changes, TCJA did the following:

  • Adjusted taxable income brackets,

  • Limited state and local income tax deductions

  • Increased the standard deduction, and

  • Limited itemized deductions.

These changes meant less employees were able to deduct charitable contributions, property taxes, and other deductions that exceeded the new standard deduction. While most employees should have revised the Deductions, Adjustments, and Additional Income Worksheet on their Form W-4 for the new tax law changes, many did not. As a result, not enough was withheld from their paycheck, and many owed tax or received a much lower tax refund.

Don't let this be you. You can take steps now to prevent or reduce your tax liability for the current year. These steps should be reviewed a few times throughout the year, especially if your streams of income change.

1. Estimate your income

Tax rates are adjusted annually. Determine whether your tax rate increased or decreased. For example, in 2017, a single taxpayer with income over $160K fell into the 28% tax bracket. For 2018, that same taxpayer fell into the 32% tax bracket.

2. Review your deductions

What deductions did you take last year? Do they still apply this year? In 2018, the standard deduction doubled and personal exemptions were eliminated. Under the Tax Cuts and Jobs Act, families with multiple children can no longer take a dependent exemptions for each child (note, the Child Tax Credit increased from $1,000 to $2,000 for each qualifying child).

3. Determine whether you qualify for any new credits

The income limits for the Earned Income Tax Credit and Retirement Savings Credit increased in 2018. Determine whether you qualify for any new credits and whether or not you are eligible for prior credits.

After assessing these three points, it's best to meet with a tax professional to project your tax liability. While your employer will adjust your withholding for any tax law changes, you'll want to confirm you are not paying in too much or too little taxes.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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