The Internal Revenue Service (IRS) headquarters in Washington, D.C.
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If you wound up owing the Internal Revenue Service surprise taxes in April, you’ll want to act now to avoid a similar outcome next year.
The IRS recently launched its new tax withholding estimator, a tool that aims to help filers narrow down the amount of federal income tax they should have pulled from their paychecks.
The new estimator replaces the tax withholding calculator the agency previously offered.
Revamps include the use of plain English as well as the ability to account for income from side gigs and the quarterly estimated taxes you pay on those earnings.
You may still want to dust off last year’s tax documents to refer to “above the line” deductions you think you’ll take for 2019, including deductions for IRA contributions outside of payroll and the student loan interest deduction.
This new tool also suggests tips to modify your Form W-4 to better tailor your income tax withholding.
“The new estimator takes a new approach and makes it easier for taxpayers to review their withholding,” said Charles Rettig, IRS commissioner, in a statement.
A balancing act
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The new tax calculator is only the latest development from the IRS as it continues to roll out changes stemming from the Tax Cuts and Jobs Act.
This overhaul of the tax law nearly doubled the standard deduction, eliminated personal exemptions and placed limits on certain itemized deductions.
Last year, the Treasury Department and the IRS updated the withholding tables, incorporating these changes.
In May, the tax authority also issued a draft of its 2020 Form W-4 to reflect the new tax law.
Payroll executives anticipate that filers will need to refer to their prior year’s tax returns to pinpoint their withholding under the new form.
Remember, if you withhold far too much, you get a large refund the following year. But you’ve also given the government an interest-free loan.
Withhold too little, and you take home more cash in your paycheck. But you may owe the IRS next spring.
Pay close attention
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The IRS warns users of its estimator tool that they should revisit their withholding in 2020.
Certain taxpayers should take an even closer look.
• W-2 employees with side gigs: Got a side gig or a summer job in addition to your 9-to-5? Odds are that you aren’t withholding enough in taxes to cover both streams of income.
• Former itemizers: Under the old tax law, people who itemized their tax returns may have withheld less tax from their pay.
However, fewer people are expected to itemize under the new law, so they should review their W-4s. That’s because the standard deduction has been nearly doubled to $12,000 for singles and $24,000 for married couples who file jointly (2018).
• Families with dependents: Previously, it may have made sense for families to have less tax withheld from their pay if they had dependents.
However, the law has done away with personal and dependent exemptions. It also broadened the applicability of the child tax credit to include higher-income households.
If you haven’t already made these updates to your withholding and you owed taxes in 2018, review your W-4 now.