Time to check…withholding

Most people don’t think about ringing in the New Year by taking a closer look at their paycheck, yet financially it’s a very good move. “Any time there is a change in the tax bill is an automatic reason to check your withholding and make sure that’s current,” said Daniel Routh, a certified financial planner at Exencial Wealth Advisors in Oklahoma City. For that reason, reviewing your W-4 is a good practice at the start of any year, but particularly this one.

Last year, the Treasury Department and the IRS released updated withholding tables 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. For the new year, the IRS has bumped up the individual income tax brackets, adjusting them for inflation.

The withholding tables are guidelines your employer follows in order to deduct the appropriate amount of income taxes from your paycheck. You can also use your W-4 to tailor the taxes withheld from your pay. If not enough is withheld, you’ll owe money come tax time. Pay too much, and you end up with a large refund. Nearly three-quarters of taxpayers withheld too much in 2018 and, as a result, will receive a refund this year. On the flipside, 21 percent of taxpayers — or about 30 million people — aren’t withholding enough taxes, according to a report by the Government Accountability Office.

While getting a bigger paycheck each pay period sounds alluring, it could come back to bite you in the form of a hefty tax bill come April. Alternatively, withhold too much and “you’ve essentially given the government a short-term loan,” Routh said. “You may as well have that money in your bank account and save it, invest it or pay down debt. “Ideally you want to come in as close to zero as possible,” he said. Before 2019, it may have made sense to withhold less from your pay if you itemized deductions. That may no longer be the case now that the standard deduction has nearly doubled.

Because of the new tax law, many of those who itemized in the past will no longer be able to do so going forward — one reason to revisit your withholding. Under the old law, it may have also made sense to withhold less in taxes if you had dependents. Now, personal and dependent exemptions are out, so these filers should review their pay stub to ensure that they’re not under-withheld. If you’ve retired, you can use Form W-4V to withhold a flat rate from your Social Security check or Form W-4P to withhold from your pension.

The IRS has a withholding calculator to help taxpayers figure out how much to have deducted from each paycheck and help you estimate your 2019 income and compare it to your current withholding. To get started, you’ll need a copy of your most recent pay stub and tax return. You can also cross-check that number with your CPA or tax preparerto make sure you are on the right track. “On the Money” airs on CNBC Saturdays at 5:30 a.m. ET, or check listings for air times in local markets.


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