The IRS' New Tax Withholding Estimator
The IRS website has extensive resources that can assist a taxpayer when they file forms, pay taxes, and when they need a 'paycheck checkup.' On August 6, 2019, the IRS launched a new Tax Withholding Estimator to help taxpayers determine the correct amount of tax that should be withheld from their paycheck this year. We must say this Estimator is a significant improvement compared to the previous one!
What is the Tax Withholding Estimator?
The new IRS Tax Withholding Estimator is a free, online tool that can be accessed by computer, phone, or tablet. Compared to the previous Estimator, this one is much more complex and interactive. If you had a high tax due amount this year, you should use this calculator. You can choose to adjust your withholdings based on the results to alter your tax due amount to almost zero dollars. Or, you can decide to make adjustments to your withholdings for a small refund of up to $500 when you file your taxes.
Why should I use the Tax Withholding Estimator?
The Tax Cuts and Jobs Act was introduced in 2017 making 2018 our first year experiencing the effects in full force. With much confusion still out there on how our income tax changed, we should all be checking the Tax Withholding Estimator as soon as possible. You can use the Estimator at any time throughout the year. However, to make sure the changes you make have time to adjust, it is better to do it sooner, rather than later.
You should also be using the Tax Withholding Estimator to calculate for significant events in your life. Just like you would update your W-4 after starting a new job, getting married, or having a baby, use the Tax Withholding Estimator at that time, too.
There is plenty to learn from the Tax Withholding Estimator. For instance, in the tax credits section of the Estimator, tax credit options are listed out for you. You can click on a question mark next to any of the credits to learn how you may be eligible for a tax credit. If you own a home and have made energy-saving improvements, you may be eligible for Residential Energy Credit! If you haven't made these improvements, you can go through the tax credit list and discover what things you can do to have a tax credit next year.
The IRS also highly suggests that certain groups of people use the Tax Withholding Estimator. If you itemized your tax deductions previously and have recently switched to the standard deduction, you are at high risk for having too little tax withheld. Of course, if you believe you have a complicated tax situation similar to the complexity of two-income households or other sources of income, you should use the calculator and adjust your withholding to the proper amount. Some tax situations may be too complicated for the Tax Withholding Estimator, so you may need to use other resources on the IRS website.
How do I use the Tax Withholding Estimator?
Before using the Estimator, you should obtain your most recent pay stubs and last year's tax return. These documents will help you answer questions such as your total wages earned this year, bonus amounts and the amount of federal income tax withheld. Once you start filling out the Estimator, the form will expand according to your responses. You can use the help tips in the form to assist you in filling out the most accurate information. Remember, accurate input yields accurate results.
How does this relate to the Form W-4 for 2020?
The Form W-4 for 2020 has changed drastically and does not have a section for withholding allowances. So, if you've used the Tax Withholding Estimator and you want to change your withholding allowances, you will need to file the 2019 Form W-4 before 2020. After 2019, the only form available will be the 2020 Form W-4.