The new tax law has been talked up as a way to put more money into the pocket of average Americans with a doubling of the standard deduction and new lower tax brackets.
But according to one new government report, it could take a bigger bite out of your refund at tax time. That’s because with the change in the law, you may not be having enough withheld out of your paycheck right now.
GAO: More Americans will be underwithheld
The non-partisan Government Accountability Office (GAO) is out with a new report that finds some 30 million Americans may owe the feds money at tax time next year. That’s due in part to the recent overhaul of tax law prompted by the Tax Cuts and Jobs Act.
Now before you panic, Market Watch notes that about 18% of Americans are traditionally underwithheld and owe money instead of getting a refund.
The impact of the new tax law is that 3 million more people are projected to join their ranks, according to the GAO numbers. That would bring the percentage of the population that owes money at tax time from 18% to 21%, or roughly 30 million of us.
Put in those terms, it’s not as drastic as it sounds when you hear that 30 million may owe taxes next year! And in truth, it’s not necessarily the fault of the new tax law that more people may owe.
After all, the Tax Cuts and Jobs Act did restructure the tax brackets into seven groups — 10%, 12%, 22%, 24%, 32%, 35%, 37% — with the highest of them down from 39.6%.
Furthermore, it also increased the standard deduction from $12,700 to $24,000 for joint returns and from $6,350 to $12,000 for individuals.
What’s to blame here is the lack of clarity around the new tax tables the IRS had to develop when the new law was introduced.
Back in January, the IRS issued new guidelines based on the GOP tax law to help companies hold the correct amount of taxes out of your paycheck in 2018.
You can see the new tax tables here.
But the GAO report says that while the IRS and the Treasury made some attempts to get the word out among taxpayers that they may owe more if they don’t change their withholding, it wasn’t good enough.
That said, it’s ultimately your responsibility to adjust your withholding in order to account for the new tax law. The IRS has a newly updated withholding calculator to make it easy for you.
“My recommendation would be to perform a paycheck checkup as early as possible,” Sara Gabrell, a CPA with metro Atlanta tax firm Value Added Inc., tells Clark.com. “Doing so will give you the rest of the year to catch up on your tax liability vs. paying the difference at tax time.”
You’ll need to fill out a new W-4 with your employer to adjust your withholding.
“Typically you fill out this form when starting a new job, but it’s a good practice to revisit it whenever you experience any major life changes — such as getting married, having children or seeing a change in the tax law,” Gabrell adds.
And if you want to be really proactive on this tax issue, you could make estimated quarterly payments to the feds using Form 1040-ES.
In reality, only 6% of us are completely tax neutral — neither getting a refund nor owing money to the government. Somewhere between 18% to 21% of us are underwithheld and owe money, as explained above.
Meanwhile, the rest of us — about three-quarters of taxpayers — get a refund each year.
So if you do nothing, this could mean that you just get a smaller refund than you may be used to, assuming you haven’t been having the correct amount withheld from your check in 2018.
But that actually may not be a bad thing in Clark Howard’s book!
The money expert has long said that if you love getting a fat refund check every year, you probably need a reality check instead.
“People try to justify their tax refunds by saying it’s a way to force themselves to save money,” the consumer champ says. “But getting a giant tax refund means you’ve made an interest-free loan to the government and your money has been working for them — not you — all year-long.”