As the federal tax changes (that we opposed) took effect, I had friends and family start talking about how their paychecks changed. Some even received e-mails from their human resources department explaining that their paychecks may look larger due to the tax cuts. Before you go on a shopping spree, though, make sure you check that you’re having enough taxes withheld.
When the Internal Revenue Service released the new tax withholding tables in January, payroll companies, bookkeepers and human resources departments made those changes in their payroll systems. The withholding tables incorporated some of the changes made in the federal tax bill, including the new standard deduction, elimination of the personal exemptions and the new tax brackets. And because of this, many workers saw large changes in their paychecks, but this was based on wages only.
The new withholding tables could result in you seeing a big surprise next April—either a much larger refund than expected or, worse, that you owe money. So to avoid those surprises, you might want to fill out a new W-4 form to adjust your withholding.
The problem is that this form can be complicated to fill out, especially if you don’t know all of the tax rules. The general rule is that the fewer allowances you enter, the more taxes are withheld throughout the year. The bigger the number of allowances means fewer taxes are withheld and will result in a smaller refund or perhaps a tax bill or penalty. But how do you know what to put down?
Thankfully, the IRS has a new withholding calculator that can help you determine whether you are over- or under-withholding.
Taxpayers who may want to double-check their paycheck include:
- Two income families, people with two or more jobs throughout the year, or people who only work for part of the year;
- Taxpayers with children who may qualify for the Child Tax Credit;
- People who itemized in 2017 (who may no longer be able to itemize); and
- High-income earners, people who have businesses, or other taxpayers who will have more complicated returns.
Some people like getting a large tax refund every year. Others like seeing bigger paychecks, even if they may mean a higher tax bill come April. Personally, my goal is to result in a refund (or payment) as close to $0 as possible. I admit that I’m not always that successful, but using the calculator helps get me closer.
Also, if you haven’t done your taxes for 2017 yet, be sure to check out our Money Back in Michigan tax credit guide.
(A COMMENT ON TAX FAIRNESS: While your paychecks may be going up now and you may be thinking that the federal tax plan is not so bad, remember that you could be seeing a tax hike by 2027 in order to pay for significant permanent corporate tax cuts. Also know that the tax plan changes that are giving some of you a few hundred dollars back this year are saving millionaires around $60,000 annually. The tax plan’s benefits are not all bad…yet—they’re just not at all fair.)