IRS Launches New Withholding Tax Estimator

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This year, many taxpayers preparing their federal tax returns found that their usual refunds were substantially smaller or had disappeared altogether. As we discussed in LMC TCJA Alert #36, this resulted from changes the IRS made to the wage withholding tables following the Tax Cuts and Jobs Act (TCJA). These taxpayers took home larger paychecks all year, leaving less overpayment available for a refund. Some taxpayers who had always received refunds even owed money to the IRS.

 

This week the IRS launched its new Tax Withholding Estimator, an expanded online tool intended to make it easier to have the right amount of tax withheld. Use of the estimator can minimize an unexpected tax bill or penalty. The estimator does not require taxpayers to provide sensitive information such as their name, address, social security number, or bank account, nor does the IRS record or save the information.

 

The estimator helps determine whether a revised withholding certificate should be filed with one's paymaster. If so, it provides the amounts needed to complete it. Employees give their employer an Employee's Withholding Allowance Certificate (Form W-4). Those who receive pension income will submit a Withholding Certificate for Pension or Annuity Payments (Form W-4P) to their payor.

 

The estimator asks taxpayers to estimate values of their 2019 income, list the number of children they will claim for the child tax credit and earned income tax credit, and enter other items that will affect their taxes. Taxpayers should refer to recent pay stubs as well as their last income tax return to ensure accurate information.

 

The tool is most helpful to taxpayers at risk of having too little tax withheld, especially those who itemized in the past but, after TCJA, now take the enhanced standard deduction. It is also useful for two-wage-earner households, employees with significant income outside their jobs, and taxpayers with other complex situations. Those who had a major life change, such as a marriage or the birth of a child, should also review their withholding.

 

IRS Commissioner Charles "Chuck" Rettig says the new estimator "is part of an ongoing effort by the IRS to improve quality services as we continue to pursue modernization and enhancements of our taxpayer relationships." Ease-of-use enhancements include a progress tracker as well as the capability to move back and forth through the steps, correct previous entries and skip questions that don't apply.

 

Written in plain, easy-to-understand English, the estimator also features tips and links to determine eligibility for credits and deductions. For those in business for themselves, a unique tool calculates their self-employment tax (the equivalent of the social security tax paid by employees). Taxpayers on social security will find it calculates the taxable portion of their benefits (which varies as income changes).

 

The estimator is just that - an estimate. A useful planning tool, it may still differ from the actual 2019 return you file next year. Contact your LMC professional if you need further help to make your tax withholding as accurate as possible. All our prior Alerts are available on the Updates page of our website.

 

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