Time to Calculate your 2018 Tax Liability

Congress overhauled the tax rates and brackets for the 2018 tax year (and beyond), when it passed the Tax Cuts and Jobs Act (the Act) at the end of 2017. The new law reduces taxes for millions of taxpayers by lowering income tax rates across the board. In addition, the Act nearly doubles the standard deduction for all filers. As a result of these changes, the IRS updated the income tax withholding tables for 2018 to help most workers ensure that they are not having too much or too little withholding taken out of their pay. How much you will benefit from the Act will depend on a lot of factors, ranging from the size of your family and how much you earn to where you live. Since the full impact of the Act will not be felt until next spring, when you file your 2018 tax return, now is the time to estimate your tax liability to avoid any surprises.

You can estimate your tax liability by using the Withholding Calculator, which the IRS revised in response to the new law and can be found on IRS.gov. The IRS encourages taxpayers to use the calculator to adjust their withholding in response to the new law or changes in their personal circumstances in 2018.

The Calculator helps you identify your tax withholding to ensure the right amount of tax is withheld from your paycheck. You can protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time next year. At the same time, with the average refund topping $2,800, you may prefer to have less tax withheld up front and receive more in your paychecks.

If you are an employee, the Withholding Calculator helps you determine whether you need to give your employer a new Form W-4, Employee’s Withholding Allowance Certificate. You can use your results from the Calculator to help fill out the form and adjust your income tax withholding. If you receive pension income, you can use the results from the calculator to complete a Form W-4P and give it to your payer.

The Calculator will ask you to estimate values of your 2018 income, the number of children you will claim for the Child Tax Credit and Earned Income Tax Credit, and other items that will affect your 2018 taxes. The IRS suggests that you follow these steps:

  • Gather your most recent pay stubs.
  • Have your most recent income tax return handy; a copy of your completed Form 1040 will help you estimate your 2018 income and other characteristics and speed the process.
  • Keep in mind that the Calculator’s results will only be as accurate as the information you provide. If your circumstances change during the year, come back to this Calculator to make sure that your withholding is still correct.

The Withholding Calculator does not ask you to provide sensitive personally-identifiable information like your name, Social Security number, address or bank account numbers. Also, the IRS does not save or record the information you enter on the Calculator.

It is important to remember the Withholding Calculator works for most, but not all, taxpayers. People with more complex tax situations should use the instructions in Publication 505, Tax Withholding and Estimated Tax. This includes taxpayers who owe self-employment tax, alternative minimum tax, the tax on unearned income of dependents or certain other taxes, people with long-term capital gains or qualified dividends, and taxpayers who have taxable social security benefits. The calculator will not determine the taxable portion of your social security benefits, but if you estimate the taxable amount (e.g., using the worksheet in the Form 1040 instructions), you can enter that into the Calculator as other nonwage income so that the calculator can take it into account.

If you have questions, contact Anderson & Jahde, PC.

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