April 15th has come and gone, and with it, the first tax season under the new Tax Cuts and Jobs Act is over. The new tax reform bill brought some big changes and consequently, there was a learning curve in this first year. While many families received tax relief under the new law, others saw their tax bill rise. One complaint heard repeatedly was regarding surprisingly small refunds compared to prior years. Some households even went from receiving refunds in 2017 to owing the IRS money in 2018. Regardless of what you were expecting from Uncle Sam, it’s never fun to be surprised come April. If you’re wondering why your refund was smaller this year, there’s a good chance it’s due to changes in employer withholding.
With so many changes going into effect last year, many people were unaware that the amount their employers withheld also changed. Having the correct amount withheld plays a big role in the amount of tax due or refund received at tax filing time. Accurate withholding also helps to avoid unwanted consequences like underpayment penalties. There’s no time like now to start preparing for next year’s tax filing period. Here are several steps you can take to better prepare yourself for 2019 taxes.
Examine what has changed
If your tax refund was significantly different than in 2018, try to identify what may have caused the change. Some common factors include lifestyle changes such as marital status, income level, or extra expenses; and changes in the tax code such as certain expenses that are no longer eligible for deductions.
Revisit employer withholdings
Next, you’ll want to take a look at your employer withholdings. This can be changed at any time during the year by filling out IRS form W-4. This is the easiest way to ensure you’re paying the proper amount to the IRS throughout the year. Determining how much to withhold can be a daunting task; luckily the IRS.gov website has a withholding calculator to help estimate what you’ll owe next year. You’ll want to have your 2018 tax return and a recent 2019 pay stub handy to help this process go smoothly.
Make a plan
Now it’s time to take all the information you’ve gathered and put it into action. Decide how much you want to withhold from your paycheck. This is an individual decision and it’s worth taking the time to think critically about your situation. If you have additional income outside of your primary employment, it may make sense to withhold extra to help cover the tax bill for your side project. You may want to avoid any overpayment at all, preferring to have slightly larger paychecks throughout the year rather than allow the government to hold onto your extra cash until next year. On the other hand, you may elect to withhold a little extra to play it safe (and because you enjoy getting a little “bonus” come April). The most important thing is to act quickly so any changes you make have more time to take effect.
Another important item to consider when making your plan is retirement contributions. Any money you contribute to a traditional 401(k) account is pretax, which lowers your income level and consequently your overall tax burden. If you haven’t already made decisions about your retirement contributions for 2019, now is the time! Remember, no matter which path is best for you, the sooner you get started the better prepared you’ll be next year.