The Internal Revenue Service reports that so far this tax filing season, refunds are 9% down from last year. Reasons for this vary, but much of the change is attributed to the new tax law. Tax withholdings for federal taxes were reduced overall back in February 2018. If you didn’t do a “Paycheck Checkup” to compare your withholdings with your projected tax liability, the bottom line on your 2018 tax return could be a lot different than in the past.
Many taxpayers focus on whether they get a refund or owe more in taxes when it’s time to file. However, that is not the best indicator of your actual tax liability. Depending on a big refund to pay off bills or take a vacation also might not be the best way to manage your finances.
Think about it. Getting a tax refund means that you let the government use your money all year long before letting you have it. In other words, a refund is an interest-free loan to Uncle Sam. Does your bank lend you money for free? No! So why should you loan money to anyone – least of all the government – for free?
So how do you avoid making an interest-free loan or having to pay a lot at tax time? You’ve got to do two things – calculate your tax liability and withholdings, and compare the two amounts. Here are some tools to help you do it:
- The IRS Withholding Calculator https://www.irs.gov/individuals/irs-withholding-calculator guides you through the steps to figure out your tax liability for 2019. Before using the calculator, make sure you understand how the IRS defines its terminology, know your pay frequency and note any life or work changes that impact your taxes (e.g., marital status).
- If you owed additional tax for 2018, you may have to pay estimated tax for 2019. Estimated payments should be made if you expect to owe at least $1,000 in tax for 2019, and if you expect your total withholdings and refundable credits to be less than the smaller of 90% of your 2019 tax liability or 100% of your 2018 tax liability. More details are at https://www.irs.gov/pub/irs-pdf/f1040es.pdf
Your refund is not an indicator of your tax liability. Potentially, it’s an interest-free loan to the government that prevents you from using your own money. Doing a “Paycheck Checkup” get control over your taxes for next year and avoid making an interest-free loan or having to pay a lot next tax filing season.